Euribor, cousin of Libor, may have been cooked too

This was my depressing reading at lunchtime:  Banking Industry Squirms Over European Rate Probe, in today’s Wall Street Journal.  

Oh great.  Looks like Euribor has been gamed by the big banks (pronounced eur-EYE-bore according to WSJ).

The article reports:

The European Union is expected soon to accuse multiple banks of attempted collusion in the setting of Euribor, according to people briefed on the probe.

Barclays Bank has admitted to gaming the rate. Other banks, four specifically, are suspected.

The Euribor is an index used for large numbers of transactions in Europe, such as home loans in Spain. It is also an indicator used by the European Central Bank in setting monetary policy.

The article says Euribor is based on rates from more than 40 banks, with the high and low rate tossed out. Instead of an actual transaction or estimate of actual transaction, the banks make an estimate of what they think a theoretical “prime bank” would pay to borrow funds from another bank. 

So the calculation includes more banks than Libor, which make it less vulnerable to one bank playing games.  On the other hand, it is intentionally a guess as to what some other bank would pay if it were in prime condition. I obviously don’t understand because it seems that makes it even more removed from any actual, real transactions than Libor.

The article cites regulators who claim that Barclays, and perhaps others, were betting on movements in Euribor from their portfolios and trying to move the rate on many occasions.  The accusations also suggest the banks were working together to move the rate.

Time to keep our eyes on another possible banking fiasco.