Hi Antoine,
I don't know where you can get real time cash 1 month libor on the net. I get rates via Reuters, Telerate and Bloomberg. For a daily update you can use the Fed's H.15 report bog.frb.fed.us
The move away from prime based lending to libor based funding is an old one and pretty much a fait accompli at this stage. There were a number of reasons. To start with, the prime rate is a relic of the past. Banks used to fund themselves largely from savings and checking accounts with less need for wholesale deposits. And most corporatins would borrow from banks, even General Motors would borrow working capital at prime from banks. So prime reflected more accurately the blended nature of bank funding. As the markets became more sophisticated both lenders and borrowers got access to greater alternatives. The public could move its money to money market accounts and get better rates than on passbook savings. As the money funds grew their appetite for investments grew. This led to the growth in the wholesale markets i.e. commercial paper and libor. This gave the corporations the ability to access short term borrowings directly from public and cut out the middle man, the banks. This process was referred to aas disintermediation.
As disintermediation continued banks started becoming more and more dependant on wholesale money, with eurodollars leading. This put more rate risk into their traditional lending practice. Prime being a daily average is better funded with money that you can pay for on the same basis. Libor gives you a problem as the rate remains fixed for the entire period. So if you fund your prime portfolio with 90 day eurodollar funding and prime drops your margin gets crushed. Banks are conservative by nature and they have a natural desire to maturity match their books. This meant that as over time their own borrowings increasingly shifted to time deposits it only made sense that their lending made the same shift in order to maturity match.
So banks shifted more towards libor based lending because it allowed them to better maturity match their portfolios and their own best customers were moving in that direction to reduce their own costs.
As stated above one of the reasons the eurodollar market got so large was the disintermediation of the banks. By going directly to the wholesale markets, large non-bank borrowers and lenders could see tighter spreads than they were being shown by the banks. In addition it is much easier to deal in the eurodollar markets. You can access large amounts of money quickly and when you need it. To generate other types of funding were generally more expensive and required more infrastructure. The lack of regualtion was also important. The lack of reserve requirements was never an issue. Money is fungible. The arbitrage instinct of the markets quickly led eurodollars to trade at a rate equal to the reserve and insurance adjusted rate of domestic deposits. An other important factor in the growth of the eurodollar market was the lack of sovereign controls. In fact the eurodollar has its birth in the Soviet Union's desire, early in the Cold War, to hold dollars outside ot the US where they would be less likely to be frozen or interfered with. much of the rest of the world learned this lesson as well, remember when we froze Iranian assets after the revolution? This led a lot of people to develop a desire to hold currency outside of the legal jurisdiction of the issuing country. All these factors contributed to the growth of the eurodollar market.
Why isn't the Fed Fund future market as large? Very few institututions actualy use Fed Funds as compared to eurodollars. It has a large public profile because of its role as an indicator of Fed monetary policy. But as a practical instrument it is only a rate for marginal cash flows and reserve management. No one actually uses the funds rate as a funding vehicle. So there is much less need for a future as a hedging tool.
As to eurodollar/libor, they are virtually the same. The futures exchanges have taken to calling the one month contract libor and the three month contract eurodollars simply to avoid confusion. As far as the rates that Yahoo quotes they are probably just pulling them from two different providers who just happen to list those maturities. Libor is simply London interbank offered rate. Eurodollar means any dollar deposited outside the US. You can have yen libor and you can have euroyen as well. Goes for all currencies. But any US dollar libor is a eurodollar. But not all eurodollars are libor. If you have dollars deposited in Tokyo they would be tibor, in Milan mibor etc. And I have pages that will show 1,2,3,4,5,6,9 and 12 month rates for libor and eurodollars. It is just jargon.
Henry |
