Libor In Question, Again

Posted by Bull Bear Trader | 5/30/2008 07:36:00 AM | | 0 comments »

Libor rose 0.03% to 2.68% after a recent Wall Street Journal article that once again questioned the validity of the key rate (update article). While 3 bps does not seem like a large move, it is the largest move in the last two weeks. The British Bankers' Association, which oversees and sets Libor, has been reviewing the system and is expected to report its finding on Friday. Potential changes include shaking-up the 16 member bank panel that provide quotes of borrowing costs to the association, as well as examining quote reporting and the Libor methodology. Given that nearly everything, including mortgages, corporate debt, and numerous financial derivatives are pegged in some degree to Libor, the ramification could be tremendous, and should probably be something investors are paying more attention to. No doubt that banks and financial institutions are considering the effects on capital and hedged positions. The effects on investors will be both obvious (mortgages) and not so obvious (derivatives) as the rate continues to come under scrutiny, and potentially rises to meet other benchmarks.

Update: The BBA met today and basically decided to do nothing, other than say they would get tough with offending members that misquote rates. They did mention that they will strengthen the oversight of BBA Libor, with details "published in due course."