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Copyright (c) 2009 North Carolina Banking Institute
North Carolina Banking Institute

Note & Comment: LIBOR Left in Limbo; A Call for More Reform

March, 2009

North Carolina Banking Institute

13 N.C. Banking Inst. 365


Justin T. Wong


I. Introduction
Three hundred and sixty trillion dollars - that is the value of financial products worldwide that are indexed to the London Interbank Offered Rate (LIBOR), which is calculated daily by The British Bankers' Association (BBA). 1 LIBOR is used to set interest rates for a wide spectrum of financial products 2 and impacts nearly everyone, from governments to corporations to individual borrowers. 3 LIBOR serves as the standard on which $ 900 billion in subprime mortgages, $ 9 trillion in global corporate debt, and countless other credit relationships depend to determine the interest rate borrowers must pay. 4

Imagine what could happen in a world where the integrity of the LIBOR calculation was wildly inaccurate - a place where purposeful manipulation or gross oversight left banks and borrowers to question the fundamentals of their credit relationship. The consequences could be staggering if the financial world discovered that the rate upon which many of its transactions were based was consistently inaccurate. 5 Would courts find the terms of credit contracts unenforceable? Would years of litigation at an enormous cost result? Could this bring down an already unstable global financial market?

While it is impossible to predict exactly what impact such a scenario could have, one thing is certain: confidence in LIBOR is essential to both banks and borrowers. 6 In the fall of 2008, LIBOR reached historic highs, both in actual terms and when compared to U.S. Treasuries 7 of comparable maturities. 8 Ironically, only ...
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