Bloomberg working on LIBOR alternative

Dan Doctoroff, the CEO of Bloomberg LP, writes in The Wall Street Journal that the company is working on an alternative to the LIBOR, or the London interbank offering rate.

Doctoroff writes, “The company’s prescription — let’s call it ‘Blibor,’ the Bloomberg interbank offered rate — isn’t revolutionary. It simply applies the principles of data-based analysis and transparency.

“To see where we are headed, let’s start with the current Libor index. It is calculated using bank estimations of the rates at which they expect to be able to borrow from other banks for various periods of time. The estimations are supposed to be based on actual loans.

“But one key problem with the current approach is the decline in actual interbank short-term lending and borrowing. With limited activity, banks—especially European institutions—have fewer anecdotal transactions upon which to base their Libor submissions to the British Bankers’ Association.

“One potential solution to this problem is to combine two types of inputs to compensate for the diminished volume in loans available for bank reference. The first input would follow the current Libor approach. The interbank borrowing rate—the numbers they submit—will be transparent. That is, if bank X says it borrowed at rate Y, that submission to Bloomberg would be public.

“The second, supplemental inputs would consist of market-based quotes for credit default swap transactions, corporate bonds, commercial paper and other sources of credit information. Analysis of these sources of information would yield an ‘indicative’ Blibor index.”

Read more here.