Libor – What Is It?

Libor – What Is It?

Often commercial real estate loan rates are based on an benchmark interest rate and the most common benchmark is Libor.  The following information comes from the most recent edition of Commercial Investment Real Estate publication and covers the basics of the benchmark.  “Libor – What Is It?”

“The recent debacle involving manipulation of the London Interbank Offered Rate caused many to wonder what exactly it is. This benchmark interest rate used throughout the world’s financial systems is determined by the British Bankers Association, according to Knowledge@Wharton.com. Every day at 11 a.m., 20 of the world’s largest banks submit interest rate data involving 10 currencies for 15 different loan terms. “The BBA then throws out the top 25 percent of quotes and the bottom 25 percent, and takes the average of the remainder,” says Wharton finance professor Richard J. Herring. “This makes it seem highly unlikely that any one bank could manipulate the rate, but on closer inspection, it is possible.”

“While less accurate than other benchmarks, Libor has persisted out of tradition and the fact that it incorporates risk into its assessment. “[Libor] is intended to reveal the banks’ real cost of money, incorporating all the market’s up-to-the-minute assessments of the risk of lending to the participating banks. In contrast, a U.S. Treasury bond rate, while set more transparently, does not include default risk. …so the two rates reflect a different set of concerns,” reports Knowledge@Wharton. Find out what alternatives might replace Libor by reading “The Libor Mess: How Did It Happen — and What Lies Ahead?” at knowledge.wharton.upenn.edu.”

Comments are closed.