May 19, 2008

DOW JONES REPRINTS

This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit:
www.djreprints.com.

• See a sample reprint in PDF format.
• Order a reprint of this article now.

Libor is in the spotlight

Central-bank officials in the U.S. and U.K. are paying more attention to the way a widely used interest rate is calculated, after unusual moves in the rate and concerns about its accuracy.

In recent days, U.S. Federal Reserve officials have been in contact with London traders who play a role in setting the rate, known as the London interbank offered rate, or Libor, people familiar with the matter say.

The Fed also has been in contact with the British Bankers' Association, a trade group that oversees Libor, to get a better understanding of the daily process of calculating Libor. The BBA and its chief executive, Angela Knight, are conducting a review that could ultimately lead to changes in the way the rate is defined and set. The banks that make up the group that sets Libor also could change. The first results of the review are due May 30.

Calculated every morning in London, Libor reflects the rate at which banks make short-term loans to one another. Policy makers look to it as a barometer of the banking system's health, and it serves as the foundation for payments on trillions of dollars in corporate securities, interest-rate contracts and mortgage loans world-wide.

In one particularly unusual move, banks' quotes for three-month and six-month U.S.-dollar loans rose sharply in the days after April 16, when an article in The Wall Street Journal highlighted the concerns about Libor and the BBA announced it would speed up its review. William C. Dudley, the executive vice president at the New York Federal Reserve, noted that increase in a speech in Chicago on Thursday.