Libor’s Risks Emerged From Clubby London Banking Culture

Aug. 14 (Bloomberg) -- With central bankers and marketparticipants rushing to find an alternative to the LondonInterbank Offered Rate (or Libor), the interest-rate index thatsets borrowing costs for consumers and multinationalcorporations, it’s a good time to ask where Libor came from. Andto ask how the midmorning estimates of a handful of London-basedbankers came to play such an outsized role in the modern, quant-driven financial system.

Libor represents the cost of one large bank borrowingunsecured funds from another, in various currencies and atvarying maturities, in the London market. Each day, the BritishBankers’ Association asks a panel of market participants, “Atwhat rate could you borrow funds, were you to do so by askingfor and then accepting inter-bank offers in a reasonable marketsize just prior to 11 a.m.?” The answers are then compiled andpublished by Thomson Reuters Corp. (Bloomberg LP, the parent ofBloomberg News, competes with Thomson Reuters in sellingfinancial and legal information and trading systems.)