BBA expedites Libor review

by Gill Montia

Story link: BBA expedites Libor review

The British Bankers’ Association (BBA) has announced that it is bringing forward its review of the way in which it calculates the London Interbank Offered Rate (Libor), the interest rate at which banks lend to one another.

Three month Libor has seen record high levels since the onset of the credit crisis, and has remained high despite three cuts in the Bank of England’s base rate since last December.

According to the BBA, the review has been prompted by the continued turbulence in the money markets.

However, some economists have been questioning the validity of the information supplied by the banks to the BBA, for rate setting purposes.

There are rumours that banks are being cautious with their data, so as not to raise concerns over liquidity.

A report in The Daily Telegraph refers to a paper published recently by Citigroup interest rate strategist Scott Peng, in which Mr Peng argues that the current liquidity crisis has damaged the interbank market and that Libor does not always reflect real interbank lending rates.

The significance of Libor, which affects mortgage and other interest rates, has been growing since last year, when the liquidity crisis exposed a widening gap between inter-bank rates and the base rate.