Libor – recommendations from the BBA
July 29, 2008
Reacting to the criticism of the Libor benchmark in these volatile times (see earlier post) , the British Banker’s Association has put forward a series of recommendations for consideration by the market. Main issue is that the current methodology for Libor is based on quotes that the participating banks say they could transact on in the market, rather than actually have transacted. This has lead to accusations that the quotes given are not representative of the market (and that some banks did not provide realistic quotes since they did not want to raise alarms over their own creditworthiness). The problem with providing only transacted rates is that you end up with incomplete Libor curves (parts of the curve/currency where no one has transacted) which in itself does not help transparency. BBA seems to be advocating more participants in providing quotes and a stricter oversight process – I feel an outbreak of transparency coming on in every corner of the market!