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.
