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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Tetris and sleep deprivation: how we can help emergency workers cope with trauma

First responders are at serious risk of developing PTSD during events like the Paris attacks. 

Some people seem able to deal with anything. They save a stranger from bleeding out in a bombed restaurant, protect passers-by from heavily armed gunmen, pull dead and dying people out of collapsed buildings, and they keep going because it is their job. These people are first responders.

When trauma goes on for days, as it has recently in Paris, however, the odds of them bouncing back from the violence, death and injury they are witnessing rapidly diminishes. They are at greater risk of developing a severe stress reaction known as post-traumatic stress disorder (PTSD). One study found that the worldwide rate of PTSD among first responders is 10 per cent, much higher than the 3.5 per cent rate among those not involved in rescue work.

Tetris to the rescue

So how best to address the problem? Research is in its infancy, but there are some promising studies. Emily Holmes’ group at the University of Cambridge has been looking at the benefits of playing Tetris, a video game, after a traumatic experience. The idea is that this could block the consolidation of traumatic memories so they don’t “flash back” later on.

For the study, her team first traumatised people by showing them distressing footage from public safety videos. The next day they invited them back into the lab to reactivate the memories with still images taken from the videos. One group then played Tetris for 12 minutes while the other sat quietly. Over the following week, the group who played Tetris had about 50 per cent fewer unwanted memories from the films compared to the group who didn’t.

The team concluded that playing Tetris helped individuals because it soaks up their visual processing capacity, making it harder for the brain to consolidate the visual parts of a traumatic memory.

Since it takes about six hours for the brain to cement a memory, the key is to play the game soon after trauma or within six hours of re-activating the traumatic memory. How long the helpful effects of playing Tetris will last and whether it will translate into helping people after real-life trauma is still unknown.

Talking it through

Other techniques, such as “updating”, taken from a highly-effective talking treatment for PTSD, may be more practical and easier to implement.

Like a detective, updating is a technique that focuses on finding new information and linking it to the case, the past memory. This is necessary because when the brain and body are in survival mode during trauma, the mind finds it difficult to encode all the relevant facts. Often key pieces of information that could make the memory less traumatic are lost. Updating links new information to someone’s memory of their trauma to make it less upsetting.

But can updating help to reduce unwanted memories after trauma?

We carried out a study, published in PLOS ONE, in which we traumatised people by showing them terrifying films of humans and animals in distress. We then divided our participants into three groups. One group watched the films again but were given new information about how long people suffered and whether or not they lived or died – essentially, they were updated. The second group watched the same films again but without the new information. And the third group watched films of humans and animals who were not in distress. The updated group had fewer traumatic memories and PTSD symptoms than the other two groups.

Updating is now being used by some UK emergency services. First responders will gather after critical incidents and update their memories of what happened before they go home.

Sleep deprivation

There are other techniques that may be helpful. One study found that depriving people of sleep may be useful in the aftermath of trauma.

But the same study found that a week after the trauma, people who had been deprived of sleep had the same number of unwanted memories as people who had slept well afterwards. Consequently, it remains unclear whether there would be any long-lasting benefits using this method. There are, however, certainly health risks linked to lack of sleep.

Still looking for a solution

To develop preventative interventions, we need to study newly-recruited emergency workers who haven’t yet suffered on-the-job trauma and follow them over time, spotting which “coping styles”, present before trauma, may predict their reactions afterwards.

For example, some people naturally react to stressful life events by dwelling on them, thinking about why they happened for hours on end. This strategy, called rumination, has been linked to PTSD in people who survived car crashes.

If rumination predicts PTSD in first responders, then preventative interventions could train people to spot when they are dwelling on an event and refocus their attention to the task at hand.

When we have identified which factors heighten emergency workers’ risk of developing PTSD, programmes can be developed to target those vulnerabilities. Only then can an intervention, directed at first responders most at risk of developing PTSD, properly protect them in their line of work.

The Conversation

Jennifer Wild is a Senior Research Fellow in Clinical Psychology at the University of Oxford

This article was originally published on The Conversation. Read the original article.