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That Dollar Libor again

Written by A Forex View From Afar on Thursday, May 15, 2008

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There is no problem with US Banks and liquidity it seems; the inter-banking loans go very well, it is just that the Libor (London Iter Bank Offered Rates) rates do not reflect it. The Banks have all the required capital they need, they may sell a 5bn stake from time to time from the assets, but that is only for publicity reasons and to appease the Fed Chairman in his repeated calls to capitalize.

One month ago the Dollar Libor had a sudden increase, after rumors about banks not telling the truth about their loan rates to one another and that the British Bankers Association (BBA) investigating the rates bank reported. Further reading can be found here

Surprisingly the Banks blamed it on the Londoners. BBA was the guilty party because US Banks reported abnormal, very low quotes.

Now, the Dollar Libor is rising again, because the BBA wants to change the way things work. On May 30, a report will be submitted to an advisory commission discussing the need of changing the way that Dollar Libor is calculated, to reflect the real conditions of US Money Markets.

Financial Times highlights the possible new ways to gauge the Libor rate;

One possible change would be to ask banks what rate other banks are borrowing at. Other possible reforms including changing the time at which the BBA calculates dollar Libor, to ensure that this is set when American markets are open, or expanding the number of US banks that submit quotes.

Really? this is it? ”ask banks what rate other banks are borrowing”. This seems quite strange. If banks do not trust each other now, to lend money between them, how could someone ask a bank about another bank? If someone wants to send rumors out then it will just report wrong rates for that bank.

The first Bankruptcies will be just around the corner with this method.

A new method is certainly needed for the Libor, but a serious one, which requires the banks response and interaction too.

FT: Speculation grows over Libor changes

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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