16 May 2008
The British Bankers' Association London
Interbank Offered Rate (BBA LIBOR) closely reflects the real
rates of interest being used by the world's big financial
institutions.
Central banks, such as the Bank of England, the US Federal
Reserve and the European Central Bank, may fix official base
rates monthly, but BBA LIBOR reflects the actual rate at
which banks borrow money from each other.
BBA LIBOR figures
are issued daily on more than 300,000 screens around the
world. Rates are quoted for a range of borrowing
periods, ranging from overnight loans to 12 months, and
a range of world currencies.
Why is it in the news?
Because BBA LIBOR
rates are calculated daily from the rates at which banks
agree to lend each other money, it is accepted
as an accurate barometer of how global markets are reacting
to market conditions.
How is it calculated?
The BBA uses Reuters
to fix and publish the data daily, usually before 12 noon
UK time. It assembles the interbank
borrowing
rates from 16 contributor panel banks at 11am, looks
at the middle eight of these rates (discarding the
top and
bottom
four) and uses these to calculate an average, which
then becomes that day's BBA LIBOR rate.
This process
is followed 150 times to create rates for all 15 maturities,
ranging from overnight to
12 months,
and all
10 currencies for which a BBA LIBOR rate is quoted.
How
did it become so important?
BBA LIBOR was first developed
in the 1980s as demand grew for an accurate measure of
the real rate
at which banks
would lend money to each other. This became
increasingly important
as London's status grew as an international
financial centre. More than 20% of all international bank
lending and more
than 30% of all foreign exchange transactions
now take place in London.
BBA LIBOR is now used to calculate
the interest rates for a range of financial instruments
and derivatives
based
on the BBA LIBOR rates are now traded on
exchanges such as LIFFE,
the Chicago Mercantile Exchange (CME) and
SIMEX. Independent research shows that financial products
worth a total
of around $150tr are indexed to BBA LIBOR.
How
often is this process reviewed?
The BBA LIBOR setting process
is reviewed annually by the Foreign Exchange and Money
Markets Committee,
a group
of
13 active market practitioners who determine
the membership of each panel, one for
each of the 10
currencies covered,
and review whether changes might be required
in the setting process.
The Committee
next meets on
Friday
30 May 2008.
The Committee's decision
is communicated to the market by press release at the
close of
the meeting.
