The recent speech on the failures and reform of LIBOR by William C. Dudley of the New York Fed is a thought-provoking read. The brief historical account of the structure and operation of the LIBOR is excellent and charts a story of institutional optimism combined with an everyday sort of human weakness for personal gain if the system allows you to "get away with it". However, the inference of regulatory disbelief and surprise that the system could be so easily manipulated -despite the internal controls - seems inadequate. My guess is that it was considered low priority and not that pernicious.

The problem described would be surprisingly banal for the lay person. Investigations into the scandal discovered that instant messaging was used between traders and the "LIBOR submitters" saying something like "hey mate, can you do me a favour and lower the 1M LIBOR rate today". It can't get more open and everyday and stands in contrast to the sophisticated rogue trading scandals.

As most economists know, the answer for these problems is to create both transparency and and market rigour that replaces the single action of individuals with many disinterested participants. A classic Hayekian solution. An instrument like the mCD provides that transparency as it is bank to customer, not bank to bank which can be so easily trader to trader. If it became a material part of deposit funding then it is more representative of unsecured funding costs than the interbank market. The Interbank market itself is too fragile as banks are the first to pull funding to other banks - why in fact the Basel III liquidity rules even assume banks default on their obligations to repay short-term interbank debt.

Nick Scott