The following editorial appeared recently in the Kansas City Star:
Trillions of dollars in loans for homes, credit cards and cars — as well as financial derivatives — are tied to an obscure interest rate called Libor, or the London Interbank Offered Rate. Up to now, it has been controlled by the British Bankers' Association, an industry group that includes many of the world's biggest institutions.
That may change soon, a move that would be a step in the right direction. The New York Times reports that the bankers' organization is preparing to relinquish control of Libor, which the bankers set up in 1986 to create a benchmark for pricing a wide variety of loans.
Libor supposedly tracks the interest rates at which participating banks can borrow from other banks — the "interbank offered rate." Except that it isn't based on real transactions. The reported rates are what the banks think they would pay.
There have been complaints going back at least to 2007 about the potential for manipulation, but little was done.
Then came the 2008 financial panic, when bank lending seized up and those obscure interest rates were suddenly thrust into the daily spotlight as barometers of the banking sector's health.3 comments on this story
Earlier this week, U.S. Commodity Futures Trading Commission Chairman Gary Gensler said Libor should be "anchored in actual, observable market transactions" to restore confidence in its integrity.
British authorities are expected to make public the findings of a review panel soon, along with plans to move control of Libor from the bankers' association to government agencies.
Gensler has pointed to the proper goal: Libor should be based on the interest rates for actual loans, not interest rates that banks think they might pay.