A Forex View From Afar

LIBOR and the Discount Window: Do bankers hide the truth?

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The LIBOR(London Inter Bank Offered Rate), one of the most important financial indicators, may be starting to lose its appeal it seems. It all started with some eye-browns raised- how could LIBOR rates be so low when banks are hungry for every possible penny?

The LIBOR is one of the most important indicators when looking at the financial market. Everyone in the world that has a loan is affected by the LIBOR rate. In its most simple form LIBOR is the interest rate banks have to pay for a loan. When a person or an institution accesses credit, it’s usually set at the LIBOR rate plus a premium.




With the recent low LIBOR rates, most analyst say banks don’t want to report the real rates that they access credit at, because they don’t want to send a message to the market saying they have a shortage of money.

Exactly the same thing happened at the Fed's Discount Window. Even if it is a great tool for accessing liquidity, banks see it as a ‘last resort” way of getting money, so using it means you are close to default.

The conclusion is that banks waste a very good way to get Discount Window liquidity, because of the way they view it. Now they are starting have the same perceptions about LIBOR.

The question may be how exactly banks want to deal with a liquidity crises, when most of the ways of getting money are seen as a last resort. Furthermore, The Fed has the open market operations above the LIBOR rate, and banks still have a rush on the Fed’s money. Strange that banks decide to take money from a more expensive source.

Later Edit: The LIBOR had risen today the most since August, after British Bankers' Association threatened to ban members that try to influence market rates.

Source:
WSJ: Bankers Cast Doubt On Key Rate Amid Crisis

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