Wednesday, June 11, 2008

LIBOR gets a makeover

(Felix Salmon) It seems that the BBA will be fiddling with Libor after all. But it's not at all clear exactly what the changes will be, or even when they will be implemented: Carrick Mollenkamp is simply saying that the number of banks on the panel will go up, and that "the changes to Libor may not be completed until autumn".

The big unanswered question now is which banks will be added to the panel. Specifically, will they be US banks with a strong reliance on funding themselves through deposits? That would help make the index more American, since at the moment only 3 of the 16 banks are US-based. But it would also make Libor even less representative of banks' creditworthiness, which is the main complaint about the index at the moment.

Ultimately, Libor is an anachronism, dating back to the days when banks really did fund themselves in the interbank market, and no amount of fiddling is going to change that. But insofar as Libor is a very important anachronism, I'm glad the BBA is working on making it as good as they can.

One other question, though: Why on earth would any bank want to join the Libor panel? Is there any upside to publicizing your borrowing costs to the world at large, and facing "a special BBA committee" any time those costs might seem unusual? I hope Angela Knight has some very strong powers of persuasion.

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