Why is LIBOR higher than the fed funds rate?
Thanks for all of your comments. Here are some clarifications: The fed funds market and the LIBOR market both reflect unsecured loans between large banks. The BBA US$ LIBOR panel is made up of 16 GLOBAL banks (including Bank of America, Citi, JPM, Barclays, UBS, Bank of Tokyo, HSBC). Most of these global banks also have a US presence and are members of the Federal Reserve, and thus are also active in the fed funds market. So, if, say, JPM wants to lend US dollars to Citi, they could do it in the fed funds market in the US or they could do it the LIBOR market in the UK. My question is: why would a bank (say JPM) charge another bank (say Citi) one rate (fed fund) for a US dollar loan in the US and another rate (LIBOR) for a US dollar loan in the UK? Since the credit risk is the same, the currency is the same, the major market players are the same, and both markets are very liquid, why should the location matter? The best answer I’ve seen so far is that the loan maturities are different.
