LIBOR setting10 June, 2008, 15:07. Posted by Zarathustra
London Interbank Offered Rate (LIBOR) is the most important interest rate benchmark in the financial market. Derivatives contracts are mostly priced and valued by LIBOR. Since March, doubts have been cast on the accuracy of LIBOR.
LIBOR is compiled by the British Banker Association (BBA), which asks different banks to quote the interest rates for loans of different maturities from overnight to 1 year. Then they take the average and publish this average rate as LIBOR. The problems with LIBOR now is that in face of the credit crunch, some banks may not want to let others to know that they have liquidity problem. So when they quoted the rate, they understated the rate. The situation was that if one is going to borrow money from UBS, he or she could probably not able to get the money at LIBOR.
Today, the breaking news is that BBA is finally going to reform the way they compile LIBOR. The measures include adding more US banks to quote the rates. But more is needed, obviously.