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Problems With Libor?
By JLP | April 16, 2008
From today’s Wall Street Journal:
One of the most important barometers of the world’s financial health could be sending false signals.
In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.
The article goes on to explain:
The concern: Some banks don’t want to report the high rates they’re paying for short-term loans because they don’t want to tip off the market that they’re desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That’s good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.
Source: LIBOR FOG – Bankers Cast Doubt On Key Rate Amid Crisis ($)
According to the article, the Libor is calculated based on input from 16 banks that report their borrowing rates. The highest and lowest rates are thrown out and an average is calculated using the remaining numbers. So, it is possible that banks could underreport their numbers, which could make the Libor lower than it should be. The article claims that if banks were accurately reporting their numbers, the 3 month Libor would be around .3 percent higher than it is now. In other words, loans tied to the Libor would be more expensive.
I guess when times were good, this wasn’t a concern. Now that things have turned south, it’s a different story.
Related:
Bankrate’s Interest Rate Indexes
Wikipedia’s Libor Page
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