Surely there's a better way to calculate LIBOR

Puppycow · 5th July 2012, 05:51 PM

The current method is based on a survey in which bankers are asked a hypothetical question. The banks for which these bankers work have an interest in the what the LIBOR rate is. Therefore a conflict of interest is built into the system.

There must be a way to get a similar number based on actual transactions, no?

psionl0 · 5th July 2012, 06:26 PM

What is the hypothetical question?

RecoveringYuppy · 5th July 2012, 07:03 PM

I've never understood why LIBOR whould be trusted either (fortunately I never really cared though).

Originally Posted by psionl0

What is the hypothetical question?

Full wording is at the link below, but it's basically "what do you think the LIBOR value is"?

http://www.bbalibor.com/bbalibor-explained/the-basics

Puppycow · 5th July 2012, 07:44 PM

Originally Posted by RecoveringYuppy

I've never understood why LIBOR whould be trusted either (fortunately I never really cared though).

Full wording is at the link below, but it's basically "what do you think the LIBOR value is"?

http://www.bbalibor.com/bbalibor-explained/the-basics

Thanks. Here's the wording:

Quote:

Every contributor bank is asked to base their bbalibor submissions on the following question:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”

Therefore, submissions are based upon the lowest perceived rate at which a bank could go into the London interbank money market and obtain funding in reasonable market size, for a given maturity and currency.

It's actually not quite "what do you think the LIBOR value is" but "what do you think the LIBOR value is for your bank", which may vary depending on how reliable the bank in question is perceived to be by other banks (or how the banker imagines that other banks perceive its own reliability).

kevsta · 6th July 2012, 09:39 AM

Bob001 · 6th July 2012, 04:11 PM

If I understand this correctly -- and maybe I don't -- the bankers are being asked "What interest rate would SOMEONE ELSE charge YOU to borrow money?" Predicting anybody else's behavior is always guesswork, especially if you have a vested interest in the answer. Wouldn't it make more sense to ask "What interest rate would YOU charge SOMEONE ELSE who met these specific qualifications under these specific circumstances?"

Aber · 6th July 2012, 04:18 PM

It makes sense because the banks will be taking money market deposits all the time, so the dealers will have a fair idea at which rate they are accepting deposits from other banks, even if there is not an actual transaction just before 11am.

5th July 2012, 05:51 PM	#1
Puppycow Penultimate Amazing Join Date: Jan 2003 Location: Japan Posts: 15,715	Surely there's a better way to calculate LIBOR The current method is based on a survey in which bankers are asked a hypothetical question. The banks for which these bankers work have an interest in the what the LIBOR rate is. Therefore a conflict of interest is built into the system. There must be a way to get a similar number based on actual transactions, no?
	__________________ “Some men are born mediocre, some men achieve mediocrity, and some men have mediocrity thrust upon them. With Major Major it had been all three.” ― Joseph Heller, Catch-22

5th July 2012, 07:03 PM	#3
RecoveringYuppy Illuminator Join Date: Nov 2006 Location: Tucson, AZ Posts: 3,848	I've never understood why LIBOR whould be trusted either (fortunately I never really cared though). Originally Posted by psionl0 What is the hypothetical question? Full wording is at the link below, but it's basically "what do you think the LIBOR value is"? http://www.bbalibor.com/bbalibor-explained/the-basics
	__________________ REJ (Robert E Jones) posting anonymously under my real name for 30 years. Make a fire for a man and you keep him warm for a day. Set him on fire and you keep him warm for the rest of his life.

5th July 2012, 07:44 PM	#4
Puppycow Penultimate Amazing Join Date: Jan 2003 Location: Japan Posts: 15,715	Originally Posted by RecoveringYuppy I've never understood why LIBOR whould be trusted either (fortunately I never really cared though). Full wording is at the link below, but it's basically "what do you think the LIBOR value is"? http://www.bbalibor.com/bbalibor-explained/the-basics Thanks. Here's the wording: Quote: Every contributor bank is asked to base their bbalibor submissions on the following question: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” Therefore, submissions are based upon the lowest perceived rate at which a bank could go into the London interbank money market and obtain funding in reasonable market size, for a given maturity and currency. It's actually not quite "what do you think the LIBOR value is" but "what do you think the LIBOR value is for your bank", which may vary depending on how reliable the bank in question is perceived to be by other banks (or how the banker imagines that other banks perceive its own reliability).
	__________________ “Some men are born mediocre, some men achieve mediocrity, and some men have mediocrity thrust upon them. With Major Major it had been all three.” ― Joseph Heller, Catch-22 Last edited by Puppycow; 5th July 2012 at 07:48 PM.

6th July 2012, 09:39 AM	#5
kevsta RBL CHeck Failed Join Date: Jun 2007 Location: in the shadows Posts: 2,382
	__________________ "The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." - Anonymous

6th July 2012, 04:11 PM	#6
Bob001 Muse Join Date: Dec 2006 Posts: 880	If I understand this correctly -- and maybe I don't -- the bankers are being asked "What interest rate would SOMEONE ELSE charge YOU to borrow money?" Predicting anybody else's behavior is always guesswork, especially if you have a vested interest in the answer. Wouldn't it make more sense to ask "What interest rate would YOU charge SOMEONE ELSE who met these specific qualifications under these specific circumstances?"
Bob001 Muse Join Date: Dec 2006 Posts: 880

5th July 2012, 06:26 PM	#2
psionl0 Illuminator Join Date: Sep 2010 Location: 31°58'S 115°57'E Posts: 4,762	What is the hypothetical question?

6th July 2012, 04:18 PM	#7
Aber Thinker Join Date: Apr 2011 Posts: 148	It makes sense because the banks will be taking money market deposits all the time, so the dealers will have a fair idea at which rate they are accepting deposits from other banks, even if there is not an actual transaction just before 11am.
Aber Thinker Join Date: Apr 2011 Posts: 148