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BBA announces steps to strengthen LIBOR

10 Jun 2008

The global borrowing benchmark BBA LIBOR is to be strengthened by reinforcing the scrutiny of its contributor banks and expanding the membership of its governing body and its panels. BBA Chief Executive Angela Knight said: "These changes will further strengthen BBA LIBOR and the confidence of its many users"

The British Bankers' Association announced a package of changes to the governance of its London Interbank Offered Rate (BBA LIBOR) at its annual conference today and issued a paper calling for views on further changes.

The benchmark by far the most widely referenced interest rate index in the world is used to set rates for financial products worth around $350 trillion. Recently it has come under the spotlight as an accurate barometer of the credit crunch, as it follows the rates at which banks perceive borrowing risk in the markets. But as the credit crunch led to stress in the markets, it also stressed this benchmark.

The changes announced today are:

  • tighter scrutiny of the rates contributed by banks into the setting mechanism, so that any discrepancies in the rates must be justified by individual contributing banks;
  • wider membership of the Foreign Exchange and Money Markets Committee, the independent body which oversees the process; and
  • increasing the numbers of contributors to some of the rate-setting panels.

The BBA will also take soundings on whether the historically transparent rate-setting mechanism is stigmatising contributors and whether a second rate-fixing process for US dollar LIBOR might be set after the US market opening.

Launching the paper at todays conference, BBA Chief Executive Angela Knight said:

"BBA LIBOR has stood the test of time: it has been published on every business day since 1985 and is among the most transparent indices in the world. These changes will further strengthen BBA LIBOR and the confidence of its many users."

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Notes to Editors

A copy of "Understanding the Construction and Operation of BBA LIBOR – Strengthening for the Future" can be downloaded from the link below.

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.

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.

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 Londons status grew as an international financial centre. More than 20 per cent of all international bank lending and more than 30 per cent of all foreign exchange transactions now take place in London.

The BBA LIBOR setting process is reviewed annually by the Foreign Exchange and Money Markets Committee, a group of 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.

Understanding the construction and operation of BBA LIBOR
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