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Will Libor go away?

By Judy Martel · Bankrate.com
Monday, July 9, 2012
Posted: 6 pm ET

As the spotlight of the Libor banking scandal, becoming known as Liborgate, turns to shine on regulators, questions are being asked about whether banks will set mortgage rates to another benchmark, such as yields on Treasurys.

Libor is the rate that is negotiated worldwide every day and provides the benchmark for commercial banking operations. The investment banking sector is most affected by the rate, but many adjustable-rate mortgages, or ARMs, are also traditionally pegged to it. For an in-depth look at how the Libor scandal affects mortgages, read the mortgage blog by Bankrate's Polyana da Costa, in which she writes that, "when your ARM loan resets, if the Libor used to determine the interest rate on the loan is incorrect -- as a result of banks' manipulation -- you may be overcharged or undercharged for your loan."

But Greg McBride, senior financial analyst for Bankrate, says Libor won't disappear as a benchmark because of the scandal, even for mortgages. "Which benchmarks are used or not will depend not on the lenders, but the investors that ultimately buy the loans," he says. "To the borrower, it makes no difference which index your loan is pegged to because the indexes tend to use different margins."

Since Libor is calculated by an average of the rates submitted each day, borrowers likely saw little effect from the scandal on their loans, according to McBride. He does, however, think there will be changes. "Over time, I think we can expect a tightening of how Libor is derived," he says, "eliminating the practice of banks submitting estimates and instead basing the calculation on hard data relating to borrowing costs."

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1 Comment
Georgina
July 10, 2012 at 12:17 pm

When you ask for a "bank" or an individual for their assessment of an interest rate...that is what you will get. When you ask for a computerized model of answer of an interest rate over time you will get a less biased interest. The rate determination for LIBOR is based on opinion from what I can assess. The banks all got what they asked for.