Why Israel Doesn’t Have Banksters”?

Israel has safeguards against the kind of interest rate manipulation that got Barclays in trouble.

 

In Israel, the equivalent of the Libor rate – the London inter-bank interest rate at the center of the recent banking scandal – is the Telbor rate.

The British banking behemoth Barclays lost its chief executive and some prestige when in early July it was accused of rigging its Libor rate to suit the interests of key clients. The fallout was dramatic, partly because the Libor rate – and acronym for the London Inter-Bank Offer rate – serves as an important benchmark in the world financial system.

The Teblor rate, on the other hand, is not even all that significant in Israel. There have been attempts to strengthen its role, but only isolated deposits and bonds are tied to it.

While it may seem like financial tomfoolery should be easier when the stakes are low, top bankers in Israel say the Telbor rate is actually harder to manipulate than the Libor rate.

Why is this?

The Libor rate comes from leading London banks' estimates of the average interest rates they would have to pay to borrow from other banks. But these banks do not actually have to do business based on the rates they provide.

In Israel, on the other hand, banks are bound by their quotes. They cannot present one rate and conduct transactions at another.

That being said, the Bank of Israel’s webpage explaining the Teblor rate says banks have been accused of inaccurately reporting their interest rates in the past.

"Transactions connected to this market are based on interest rate quotations by the commercial banks on inter-bank shekel loans for various terms, while the 'Telbor' interest rates are calculated from these quotations, and may serve as a basis for derivative assets,” the website says. “However, in light of assessments during 2006 among participants in the market that the Telbor interest rate as reported does not provide a reliable indication of the 'true' interest rate for transactions that are actually concluded among the banks, a decision was made to help develop this market."

What did Israel’s central bank do to alleviate concerns of rate rigging?

In 2007, it created a Telbor Interest Rate Committee to determine the rules of the game for the Telbor market. The committee decides exactly how the daily Telbor rate is to be calculated and sets standards for transparency.

It gets each of its four members from a different Israel institution: the Bank of Israel's research department, its market division, the Tel Aviv Stock Exchange and the Israeli branch of the international ACI Financial Markets Association – an association of foreign exchange dealers.

All Israeli banks have representatives at ACI and so are also represented on the Telbor Interest Rate Committee.

The committee’s rules hold that a bank publishing a Telbor rate quote must undertake to enter at least 15 transactions at the quoted rate, together worth at least NIS 50 million. The upshot is that Israeli banks cannot enter into transactions at a rate other than the one they quote.

Libor has no such mechanism, say Israeli bankers.

Moreover, if a bank's quotes look a little off, it will have to explain itself to the committee and aberrant quotes do not make it into the Telbor calculation. This, dear readers, is why Israel does not have “banksters” – banking gangsters – at least not the type that fiddle with interest rate calculations.