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Fast Facts: WHAT IS LIBOR?

There has been a lot of Congressional and press attention paid to LIBOR. Here is some useful background:

FACT: The London Interbank Offer Rate (LIBOR) is a benchmark rate of how much it costs large banks in London to borrow money from each other each business day. It is calculated and published by Thomson Reuters on behalf of the British Bankers' Association (BBA).

There are actually 150 LIBOR rates published each day, reflecting interbank borrowing costs in 10 major currencies and for 15 borrowing periods ranging from overnight to 12 month loans.

FACT: To calculate LIBOR, the BBA polls 18 banks every day with 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?

The BBA throws out the highest and lowest portion of the responses, and averages the middle. At 11:30 am (London time), Thomson Reuters publishes the LIBOR average.

FACT: LIBOR itself is not an interest rate, but it is used to set short term interest rates around the world.

It is estimated that $550 trillion of interest rate derivatives contracts are based on LIBOR rates.

One estimate by staff of the Federal Reserve Bank of Cleveland found that 45% of prime adjustable rate mortgages use LIBOR as the benchmark. A financial adviser to municipalities stated that about 75% of municipalities have some contracts tied to the index.

FACT: LIBOR is unique because:

It is reported daily, whereas central banks such as the Bank of England and the Federal Reserve fix official base rates monthly and interest rates are subject to monetary policy.

It is London-based, where more than 20% of all international bank lending and more than 30% of all foreign exchange transactions now take place. There are similar indexes by other banking associations for borrowing costs in other locations, (EURIBOR for Europe, and TIBOR for Tokyo).

FACT: LIBOR was first developed in the 1980s as demand grew for an accurate measure of the real rate at which banks could borrow money from each other. This became increasingly important as London's status grew as an international financial center.

The 18 Banks on the Reporting Panel for LIBOR 1. Bank of America 2. Bank of Tokyo-Mitsubishi UFJ 3. Barclays Bank 4. BNP Paribas 5. Credit Agricole 6. Credit Suisse 7. Citigroup 8. Deutsche Bank 9. HSBC 10. JP Morgan Chase 11. Lloyds Banking Group 12. Rabobank 13. Royal Bank of Canada 14. Socit Gnrale

15. Sumitomo Mitsui Banking Corporation 16. The Norinchukin Bank 17. The Royal Bank of Scotland Group 18. UBS Source: British Bankers Association

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