So, why do some American lenders prefer to use LIBOR as opposed to the U.S. Prime Rate — or some other American index like a Treasury Bill yield — for pricing their loans?
Banks like the LIBOR rates because when global credit market conditions deteriorate, the LIBOR rates are modified rapidly and accordingly (LIBOR rates are updated every UK business day.) Risk is a lender’s primary concern, so it can be argued that pricing loans using an index that’s more sensitive to the unpredictable nature of global money markets is more practical. For instance, when the subprime mortgage-inspired credit crunch hit global financial markets back in August of 2007, the shorter-term LIBOR rates went up because financial institutions that participate in the London wholesale money market weren’t sure which banks had exposure to subprime debt.
