LIBOR – A Brief Guide - Global Paper Money

During the past several weeks, the LIBOR has drawn added attention as an indicator of the economic health of the European banking industry. This interest, in part, has been stimulated by debt woes in Portugal, Spain, Ireland, and Greece (and now Hungary). LIBOR is short for London interbank offered rate. It was developed in the mid-1980s by the British Bankers Association as a measure of the rate at which banks might be able to borrow money from each other. The LIBOR is actually many rates calculated for periods ranging from overnight to 12 months for each of 10 currencies. The rates are determined by polling a panel of eight to 16 banks each London business morning to determine “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 a.m.?” The panel of banks differs for each currency. Data are submitted to Thomas Reuters, calculated as the arithmetic mean of the two middle quartiles, and reported as the LIBOR rates. The rates are used as the basis for various types of lending, for calculating residential mortgages, and for derivatives traded over-the-counter and on certain exchanges. The LIBOR also is one of many indicators analysts use to monitor global markets and market conditions. The LIBOR was one of the earlier indicators of market trends preceding the announcement of hedge fund losses by Bear Stearns in July 2007 So why the recent interest? Normally, the LIBOR varies little from expected interest rates, but the LIBOR has been gradually increasing, even though central banks have been maintaining low rates. Although the increase has been minimal, the trend has been enough to warrant speculation, particularly combined with concerns that the euro is becoming less stable because of debt in some European nations. Many sites provide additional information about the LIBOR, but a good place to start is http://www.bbalibor.com. Another is http://www.wsjprimerate.us/libor/index.html.