Friday, July 06, 2012

London Interbank Borrowing Rate (LIBOR) is just an estimate of the cost of money. The 18 largest banks in the UK submit this estimate every day to the British Bankers Association (BBA). There may not be actual trades on which to base this interest rate.
Here's the definiton of the process provided by the Association; the emphasis is mine.


"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.

 
bbalibor is not necessarily based on actual transactions, as not all banks will require funds in marketable size each day in each of the currencies/ maturities they quote and so it would not be feasible to create a suite of LIBOR rates if this was a requirement. However, a bank will know what its credit and liquidity risk profile is from rates at which it has dealt and can construct a curve to predict accurately the correct rate for currencies or maturities in which it has not been active.' "

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

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