The British Bankers’ Association has brought forward a review of how it sets LIBOR thanks to industry fears that the system isn’t working.
The BBA calculates LIBOR figures in various currencies for borrowing periods ranging from overnight to 12 months based on an average of interbank rates from a 16-strong banking panel each morning.
These rates are then used as a benchmark for mortgage and other interest rates.
But in a report entitled Is LIBOR broken? Scott Peng, interest rate strategist for Citigroup, says: “The liquidity crisis has damaged the interbank market, resulting in LIBOR sets that at times deviate significantly from real lending rates.”
Alan Cleary, managing director of edeus, says: “This is a welcome move. LIBOR is supposed to be the rate at which banks lend to each other but it has become the rate at which banks don’t lend to each other.”