Libor - no easy fix - FT.com When London cabbies have ideas on how to sort out Libor, it's time to reassess the merits of today's system.The daily benchmark for trillions of dollars of loans and derivatives is set by 18 banks that submit estimates of their borrowing costs. Libor is the average struck after excluding the top and bottom 25 per cent of submissions. But when banks were found to have manipulated it, Libor's credibility was undermined. Never mind that the eurozone's debt crisis and regulation have all but killed off interbank lending. Should Libor be replaced, or improved? The major criticism of Libor is that it is an estimate, and not based on actual trades. Since banks are not held to the rates they submit, it is open to manipulation (submissions are confidential until the rate is set). In times of stress, say, weaker banks would want to avoid posting unduly high rates. Or banks might submit rates to suit their book. But an oft-cited alternative approach to Libor, based on using closing prices - of repurchase (repo) rates, for example - is arguably more manipulable. But altering the status quo could be costly, given the volume of Libor-based contracts. Alternatives, such as a Bank of England Treasury bill-based rate plus a margin would result in fragmentation and are limited by geography and currency. And the BoE, for example, does not routinely issue paper at all Libor maturities. Instead, the existing process could be improved by increasing the number of panel banks, to make submissions more representative. Governance and transparency could be assured by a credible third party - such as the Depository Trust and Clearing Corporation of the US or the International Swaps and Derivatives Association - policing submissions versus actually borrowing costs. Sanctions could include panel ejection for miscreants, and fines. Libor needs fixing, not trashing.