QUOTE AND NEWS
Sober Look  Oct 30  Comment 
Some recent numbers from the US treasury a showing a continuing decline in the total amount of interest paid on residential mortgages in the US. The question is what is causing the decline. The most obvious answer is the tremendous drop in...
FX Street  Oct 28  Comment 
Comment: The strongest daily close ever, and March 2010 Eurodollars doing something similar, as we ponder how low rates can go. Note: 50-year Index-Linked Gilts are yielding just 34 basis points. Although 3-month Libor remains stuck around 0.59%,...
Clusterstock  Oct 27  Comment 
Patrick Pulatie, the head of a company called Loan Fraud Investigations, lands decisively on the side arguing that the coming OptionARM explosion is real and going to be a crisis. IAmFacingForeclosure.com (via Mortgage Lender Implode-o-Meter):...
FX Street  Oct 15  Comment 
Comment: Almost record volume last week (and record for this contract on the 9th October), just behind that of the week ending the 7th June, suggest traders have not entirely grasped the dynamics behind this market; either that or blame it on...
Sober Look  Oct 8  Comment 
Something's rotten in the kingdom of LIBOR measuring organizations. Euro LIBOR, computed by the British Banker’s Association recently has been visibly below EURIBOR computed by the European Banking Federation. The two should be right on top of...
FX Street  Sep 24  Comment 
While FX trading seems to become increasingly bifurcated (broad USD weakness & broad JPY strength or vice versa), the unfolding trend remains a concerted move away from the QE currencies (USD, GBP) and into the commodity/high yielders as well as...
FX Street  Sep 23  Comment 
Comment: Slightly unstable as moving averages and the Ichimoku ‘cloud’ are decidedly bullish but the weekly candles show contracts trading up in a third leg of a potential ‘broadening top’. While above 99.000 we shall allow for yet more...
FX Street  Sep 23  Comment 
  Market Review - 22/09/2009 20:57      All times in GMT   Dollar falls broadly as economic recovery hopes remain The greenback fell across the board on Tuesday as optimism on economic recovery spurred continued purchases in high-yielding...
Jutia Group  Sep 21  Comment 
A fascinating thing just occurred in the global interest rate market: For the first time since 1993, it became cheaper to borrow dollars than Japanese yen! The three-month dollar-based London Interbank Offered Rate, or LIBOR, slumped to 0.292...
Sober Look  Sep 19  Comment 
US Banks continue to hoard over $850 billion in cash at the Federal Reserve. They are required to hold some reserves there, but since the Fed started paying interest on deposits last year, that amount spiked and stayed at these elevated levels....
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The graph to the left is for the 3 month LIBOR.

LIBOR, or the London Interbank Offered Rate, is the average interest rate between banks in the London interbank market. LIBOR is a widely used short-term interest rate benchmark since it is designed to reflect the cost of borrowing between some of the world's largest, most reputable banks.

What is LIBOR?

There isn't just one LIBOR; there are numerous rates determined by two variables:

Every business day at just after 11:00 am London time, the British Bankers' Association, in conjunction with Reuters, releases new rates for each combination of these.[3] For example, there's a new 3-month LIBOR for the yen, overnight LIBOR for the euro, and 2-week LIBOR for the pound released daily. These rates indicate both the health of the currencies (and their respective economies) relative to one another and expectations about future economic conditions.

There are ten LIBOR panels, one for each of the ten currencies for which the rate is determined. Each panel is composed of at least eight contributor banks, chosen for their reputations and their perceived expertise in a given currency. The BBA takes the daily deposit rates reported by its designated contributor banks and calculates the mean of the middle 50%; the resulting number is the LIBOR for the currency in question.[4] The average rates at which these banks say they would lend to one another is taken as an indication of the health of the banking systems of the ten LIBOR currencies. A list of the panels and their members as of May 30, 2008, can be found here on the British Bankers' Association's website.

Why is LIBOR important?

Not only does LIBOR provide information about the cost of borrowing in different currencies, it actually influences it. LIBOR is used as the basis for other interest rates across the globe. IE, variable interest rate loans such as mortgages and car loans will often be quotes at LIBOR + a percentage. For example, a loan that was LIBOR + 5% would charge 10% interest when the LIBOR is 5%, and 7% when the LIBOR is 2%.

Estimates for the total value of financial products with rates tied to LIBOR vary widely, from as low as $150 trillion,[5] to $360 trillion, [6]to as high as $500 trillion.[7]

LIBOR impacts financial instruments and products including:

Additionally, the difference between the libor rate and the interest rate on treasury bills is a key marker of the financial health of banks. For more information, see TED Spread.

Criticism

On May 29, 2008, the Wall Street Journal reported that certain banks had been reporting lower rates to the BBA than what WSJ analysis suggested they should have been.[8] Given the trillions of dollars tied to the LIBOR, even a small inaccuracy in either direction can cost lenders, borrowers, companies, or even whole economies billions of dollars. The WSJ study estimated that, if true, the artificially low U.S. dollar LIBOR saved U.S. borrowers about $45 billion over the first four months of 2008.[9] The banks, however, denied this claim and stuck by the rates they'd reported to the BBA and Reuters.

Charts









References

  1. British Bankers' Association - BBA LIBOR Panels
  2. BBA - Historic LIBOR Rates
  3. BBA LIBOR Frequently Asked Questions, British Bankers' Association.
  4. London Interbank Offered Rate - Wikipedia
  5. Yanked from Obscurity: Why Finance Experts Are Rethinking LIBOR - Knowledge@Wharton
  6. We are the World: We are LIBOR - LIBORATED.com
  7. Bankers Cast Doubt On Key Rate Amid Crisis - WSJ.com
  8. Study Casts Doubt on Key Rate - WSJ.com
  9. Study Casts Doubt on Key Rate - WSJ.com
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