Surely there's a better way to calculate LIBOR

[Puppycow]

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]

What is the hypothetical question?

 

[RecoveringYuppy]

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

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]

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:

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]

 

[Bob001]

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]

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.