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LIBOR Under Attack

 

The article below from Risk Magazine (click on the image for the whole article).  Quite an interesting read, a very good insight into the interbank market and just how little risk the banks these days are willing to take on each other.  The banks, British ones especially, have been complaining quite a lot about attacks on the validity of LIBOR; with OIS to LIBOR spreads where they are at the moment I can understand why people with products linked to LIBOR are a little uneasy.  I read an article the other day about a shop in New Jersey formulating an alternative, more representative measure of LIBOR that is better suited to US markets.  Maybe LIBOR’s days really are limited?

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Whether or not LIBOR’s days are limited is besides the point; what I really wanted to demonstrate is just how little risk the banks are willing to take on each other at the moment compared to historical averages.  The plots below show the historical spread between three-month LIBOR and a three-month overnight index swap running back to the start of 2006.  Historical average spread was about 10BP, indicating a pretty low level of risk in the interbank market.  That was until August of last year, that is, when they blew out to their current credit crisis levels, sometimes reaching as much as 100BP!  They sure are crazy times we’re livin’ in…

OIS LIBOR

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