The Libor Scandal: Is Israel's Telbor Also Vulnerable?

Its Telbor interbank rate is safe from fiddling, for one thing because banks have to do business at the rates they quote.

The apparent attempt at Barclays to rig the London InterBank Offered Rate, better known as Libor, rocked the global banking world. Which begs the question: is Israel's benchmark lending rate also vulnerable to manipulation?

Because of its huge volume of trade, Barclays bank stood to gains tens of millions of dollars a day by slightly adjusting its transaction figures going into the Libor, which is set daily based on reports by 150 different major banks regarding what they would pay to borrow and lend money to other banks. Ultimately, though, the British banking behemoth 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.

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: the Tel Aviv InterBank Offer Rate. In contrast to Libor, the Telbor hasn't yet gained much of a footing in the local market despite efforts by the Bank of Israel to promote its status. Few Israeli deposits or bonds have their interest rates pegged to Telbor.

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?

While Libor is set by interest rate quotes given by banks - without the need to provide data on individual transactions - banks in Israel can only cite interest rates actually used in giving or receiving credit, they assert. Put otherwise, the foreign banks do not actually have to do business based on the rates they provide. Israeli banks do: the banks are bound by their quotes. They cannot present one rate and conduct transactions at another.

That said, the Bank of Israel’s webpage explaining the Telbor 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 the Telbor Interest Rate Committee, which sets the ground rules for the Telbor market. The committee decides exactly how the daily Telbor rate is to be calculated and sets standards for transparency.

The committee consists of four members: a representative of the Bank of Israel's research department, one from its market division, a representative of the Tel Aviv Stock Exchange and a representative 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 combined. The upshot is that Israeli banks cannot enter into transactions at a rate other than the one they quote.

Libor has no such mechanism of checks and balances, 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.

Israeli banking officials are confident that the Libor scandal won't have direct implications on the local market, but they are worried about a loss of confidence in the global banking system. Borrowers with loans pegged to Libor could suffer from higher financing costs as a result of adjustments to bring Libor in line with the "real" rate. They are also worried that the British banks might be hit by heavy class-action lawsuits that could affect the entire international financial system.