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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The economics of outrage: Why you haven't seen the end of Katie Hopkins

Her distasteful tweet may have cost her a job at LBC, but this isn't the last we've seen of Britain's biggest troll. 

Another atrocity, other surge of grief and fear, and there like clockwork was the UK’s biggest troll. Hours after the explosion at the Manchester Arena that killed 22 mostly young and female concert goers, Katie Hopkins weighed in with a very on-brand tweet calling for a “final solution” to the complex issue of terrorism.

She quickly deleted it, replacing the offending phrase with the words “true solution”, but did not tone down the essentially fascist message. Few thought it had been an innocent mistake on the part of someone unaware of the historical connotations of those two words.  And no matter how many urged their fellow web users not to give Hopkins the attention she craved, it still sparked angry tweets, condemnatory news articles and even reports to the police.

Hopkins has lost her presenting job at LBC radio, but she is yet to lose her column at Mail Online, and it’s quite likely she won’t.

Mail Online and its print counterpart The Daily Mail have regularly shown they are prepared to go down the deliberately divisive path Hopkins was signposting. But even if the site's managing editor Martin Clarke was secretly a liberal sandal-wearer, there are also very good economic reasons for Mail Online to stick with her. The extreme and outrageous is great at gaining attention, and attention is what makes money for Mail Online.

It is ironic that Hopkins’s career was initially helped by TV’s attempts to provide balance. Producers could rely on her to provide a counterweight to even the most committed and rational bleeding-heart liberal.

As Patrick Smith, a former media specialist who is currently a senior reporter at BuzzFeed News points out: “It’s very difficult for producers who are legally bound to be balanced, they will sometimes literally have lawyers in the room.”

“That in a way is why some people who are skirting very close or beyond the bounds of taste and decency get on air.”

But while TV may have made Hopkins, it is online where her extreme views perform best.  As digital publishers have learned, the best way to get the shares, clicks and page views that make them money is to provoke an emotional response. And there are few things as good at provoking an emotional response as extreme and outrageous political views.

And in many ways it doesn’t matter whether that response is negative or positive. Those who complain about what Hopkins says are also the ones who draw attention to it – many will read what she writes in order to know exactly why they should hate her.

Of course using outrageous views as a sales tactic is not confined to the web – The Daily Mail prints columns by Sarah Vine for a reason - but the risks of pushing the boundaries of taste and decency are greater in a linear, analogue world. Cancelling a newspaper subscription or changing radio station is a simpler and often longer-lasting act than pledging to never click on a tempting link on Twitter or Facebook. LBC may have had far more to lose from sticking with Hopkins than Mail Online does, and much less to gain. Someone prepared to say what Hopkins says will not be out of work for long. 

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