The LIBOR Scandal and the CRE Industry
The London Inter Bank Overnight Rate (LIBOR) is set by a panel of 18 banks that report daily estimates of what interest rate they would need to pay to borrow money for three months from other banks. The top four and bottom four estimates are disregarded, and the average of the remaining ten rates determine that day’s LIBOR.
British investment bank Barclays PLC admitted this summer that it had been reporting false information as part of the process of determining LIBOR. More than a dozen other banks remain under investigation for doing the same thing, according to an article in National Real Estate Investor.
Barclays reported higher rates prior to 2008 in order to improve its position on some derivatives contracts and then lower rates after the financial crisis – which could lead to larger banks having an edge over smaller banks.
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Unless LIBOR is eliminated entirely, it is unlikely that this scandal will have a dramatic effect on commercial lending. The article notes that no commercial real estate firm is involved in a lawsuit related to the scandal and there doesn’t seem to be any commercial real estate borrowers joining a potential class action lawsuit. Furthermore, according to the Mortgage Banker’s Association (MBA) Quarterly, commercial and multi-family origination volumes during the second quarter of 2012 increased by 25 percent from the same quarter in 2011 and by 39 percent from the first quarter of 2012.
The elimination of LIBOR will at the very least cause some confusion in the industry. Some contracts and notes stipulate how rates will be calculated in the event that LIBOR goes away but others leave the matter open. Sorting through the papers and establishing a new standard will be costly and time-consuming.
Last Updated on September 13, 2012 by Ramin Seddiq