How to set Libor in a post-Barclays age

Time for the banks to have some skin in the game

The Libor-fixing scandal is obviously problematic for a number of reasons, but one of the biggest ones is that it isn't entirely clear how to prevent it happening again. The only reason we know for sure the rates were artificially set are the (still astonishing) internal emails from Barclays requesting that.

The issue is that, certainly at the height of the financial crisis, and even now, Libor relies on self-reported rates. Banks rarely actually borrow in large quantities from the inter-bank market any more, so rather than reporting what they are borrowing at, they are forced to report what they think they could report at. The problem then is that unless you have cast-iron evidence that there is an ulterior motive, its hard to distinguish rate-fixing from just not really guesstimating your rates very well.

Some have responded to this by arguing that the replacement to Libor should be based on actual borrowing. If a bank isn't borrowing on the inter-bank market, they report some other similar cost of capital; if they aren't borrowing at all, they don't submit. But in the FT today, Frank Partnoy comes up with another, more ingenious solution:

The teeth of the new regulation would be a rule requiring the bank that submitted the lowest Libor estimate to lend a significant amount of money, say $1bn, to the Libor Trust at its submitted low rate. Conversely, the bank submitting the highest Libor estimate would be required to borrow the same amount from the Libor Trust, in the relevant currency for the specified period of time, at its submitted high rate.

So if Barclays under-reports its rate by 1 per cent and finds itself the lowest reporting bank, it suddenly loses out on $10m over the course of a year. And the same problem if it over-reports. If, meanwhile, RBS over-reports by 1 per cent, it loses out on the same; and the trust in charge of setting the rates pockets the $20m difference (which could then go towards running costs, into the Treasury, or some other noble cause).

If there is a problem with that, it's that it may not be entirely painless to be forced to borrow $1bn even at accurately reported rates. But that seems like a small price to pay for regenerating trust in a system which has suffered a severe blow.

Barclays. Rates up, up, up? Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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I believe only Yvette Cooper has the breadth of support to beat Jeremy Corbyn

All the recent polling suggests Andy Burnham is losing more votes than anyone else to Jeremy Corbyn, says Diana Johnson MP.

Tom Blenkinsop MP on the New Statesman website today says he is giving his second preference to Andy Burnham as he thinks that Andy has the best chance of beating Jeremy.

This is on the basis that if Yvette goes out first all her second preferences will swing behind Andy, whereas if Andy goes out first then his second preferences, due to the broad alliance he has created behind his campaign, will all or largely switch to the other male candidate, Jeremy.

Let's take a deep breath and try and think through what will be the effect of preferential voting in the Labour leadership.

First of all, it is very difficult to know how second preferences will switch. From my telephone canvassing there is some rather interesting voting going on, but I don't accept that Tom’s analysis is correct. I have certainly picked up growing support for Yvette in recent weeks.

In fact you can argue the reverse of Tom’s analysis is true – Andy has moved further away from the centre and, as a result, his pitch to those like Tom who are supporting Liz first is now narrower. As a result, Yvette is more likely to pick up those second preferences.

Stats from the Yvette For Labour team show Yvette picking up the majority of second preferences from all candidates – from the Progress wing supporting Liz to the softer left fans of Jeremy – and Andy's supporters too. Their figures show many undecideds opting for Yvette as their first preference, as well as others choosing to switch their first preference to Yvette from one of the other candidates. It's for this reason I still believe only Yvette has the breadth of support to beat Jeremy and then to go on to win in 2020.

It's interesting that Andy has not been willing to make it clear that second preferences should go to Yvette or Liz. Yvette has been very clear that she would encourage second preferences to be for Andy or Liz.

Having watched Andy on Sky's Murnaghan show this morning, he categorically states that Labour will not get beyond first base with the electorate at a general election if we are not economically credible and that fundamentally Jeremy's economic plans do not add up. So, I am unsure why Andy is so unwilling to be clear on second preferences.

All the recent polling suggests Andy is losing more votes than anyone else to Jeremy. He trails fourth in London – where a huge proportion of our electorate is based.

So I would urge Tom to reflect more widely on who is best placed to provide the strongest opposition to the Tories, appeal to the widest group of voters and reach out to the communities we need to win back. I believe that this has to be Yvette.

The Newsnight focus group a few days ago showed that Yvette is best placed to win back those former Labour voters we will need in 2020.

Labour will pay a massive price if we ignore this.

Diana Johnson is the Labour MP for Hull North.