Predictive Analytics: LIBOR Case Study

Updated: Mar 4, 2020

Yesterday, this blog observed that predictive analytics does not always require AI. Sometimes, a simple calendar with an alerting function can help strategists and analysts appear clairvoyant when really all they are doing is connecting the dots faster.

For example, if on Sunday our calendar showed you this array of meetings concentrated in the week ahead, the average analyst or strategist would know that the global publicly policy debate would shift towards financial stability and market liquidity risks.

It does not take a rocket scientist to realize that when action levels are high regarding market liquidity issues…without a financial crisis…interesting structural shifts are underway within technical policy. So when we looked this morning at what was driving market liquidity, the first item that popped up was this hyper-technical action from the European Central Bank regarding the shift away from LIBOR to locally-based benchmarks for pricing financial contracts.

The language of the statement is as important (and alarming) as the issuance of a statement itself. The report text is more problematic:

Financial market participants in the working group are allied with the central bank for the world’s second largest reserve currency begging market participants to stop pricing their contracts using LIBOR. Even though no one, including the experts, knows how pricing curves and overnight rates will eventually operate in the wild, open markets once they are in use. While the overnight rate issue is acute in Europe, other comparable challenges exist in the United States, Japan, and other global reserve currencies simultaneously creating localized pricing benchmarks to replace LIBOR.

Presto. Predictive analytics. The full scope of strategically significant market liquidity risks for the next three years are now on display.

Scenario analysis designers need to be modeling right now a range of technical issues regarding risk pricing, operational risks associated with financial contract re-pricings, re-negotiations, and possible litigation, as well as related regulatory capital risks, bank liquidity challenges....particularly if in parallel after Brexit the European Systemic Risk Board decides to reject AT1 and Tier 2 instruments currently recognized as regulatory capital because those instruments do not recognize the authority of the SRB to mark down the contracts in a resolution situation.

Regarding the resolution risk issue in Europe, please see our blog post from earlier this week HERE, written just after the European Systemic Risk Board released proposed rules for how to treat AT1 and T2 capital instruments in "third countries" (ie., the UK and the US, among others).

If policymakers gathered in various G20, FSB, and EU formations this week are not worrying about the financial stability risks on the horizon prior to and after 2022, they should be.


These insights were acquired and powered by BCMstrategy, Inc.'s patented policy risk measurement process which delivers daily momentum measurements for global market activity regarding key issues as well as time series data which is not depicted above. For more information on how the platform can accelerate your ability to identify strategically significant developments please contact us. If you would like to join our free and open Slack channels, we will be glad to send you an invitation if you reach out to us.