Tavagapedia

Libor



Key Takeaways

  1. LIBOR stands for London Interbank Offered Rate.
  2. The Libor rate is referred to as a standard interest rate by major leading international banks for lending and borrowing purposes.
  3. Intercontinental Exchange (ICE) calculates the Libor rate every day and is published by Reuters around 11.45 am London time.

What is LIBOR?

LIBOR stands for London Interbank Offered Rate.

Libor is the standard interest rate, which is used by major leading banks for lending purpose to each other in the international market for short-term loans. It is the most widely used standard rate interest rate in almost all countries of the world.

About Libor

Libor is a reference or benchmark rate used to borrow or lend funds in the London wholesale money market or interbank lending market.

Eurocurrency deposits tend to yield higher than domestic deposits do, and loans tend to be cheaper than in local do, and loans tend to be less expensive than in domestic markets. Generally, loans are made at a certain percentage above the London Interbank Offered Rate (LIBOR), which is a short-term interest rate for loans in London. Until recently, the British Banker’s Association published Libor rates in 10 currencies and 15 different maturities based on rates submitted by 18 different banks, reflecting the rate at which banks can borrow from each other.

However, in 2012, a scandal broke out in London over how Libor was set. There were rumors that bankers were collaborating to fix the rates, and since then, tens of billions of dollars in fines have been charged against the worst offenders. In 2014, the responsibility for setting Libor shifted to the International Exchange or ICE. Now the ICE benchmark administration is responsible for setting interest rates for five currencies in seven different maturities. The most common ICE Libor rate is the 3 months US dollar rate. ICE Libor is the benchmark interest rate for a variety of debt instruments, including corporate bonds, mortgages, credit cards, etc. The Libor benchmark three-month rate is a reference rate for $160 trillion of loans in the United States and $350 trillion in global credit when Asia and Europe are included. More recently, a group of global banks has been working with US regulators to come up with a replacement for Libor. Until then, ICE Libor is still the standard.

How is Libor calculated?

To know the borrowing costs between the banks, the Libor rate is referred to as a standard interest rate by major leading international banks. Intercontinental Exchange (ICE) calculates the Libor rate every day and is published by Reuters around 11.45 am London time. Earlier it was done by British Bankers Association, but from 2013 onwards, it is done by Intercontinental Exchange (ICE). Libor rate is calculated for five currencies, which include, US dollar, the Euro, the British Pound, the Japanese Yen, and the Swiss Franc and for seven different maturities – 1 day, 1 week, 1, 2, 3, 6 and 12 months. From these, it is concluded that there are 35 types of Libor rates.

Before the ICE, Libor was calculated by British Banker’s Association with a panel including banks representing countries of each mentioned currencies. The selection process for membership of the ICE Libor panel is held every year. In the board, only those banks are considered for which play a significant role in the London market. If we take the US dollar as an example, then the panel for ICE US Dollar Libor includes significant banks such as UBS, JP Morgan Chase, Barclays, Citibank, Bank of America, and Deutsche Bank. 

Libor rate is calculated by obtaining quotations from 18 global banks with high credit rating, for the rate at which banks are interested in lending. These quotes are published to ensure transparency in the market. But whenever there is a change in Libor, it impacts interest all over the world, which means changes in Libor, affects the rate of interest on floating loans world over such as corporate loans or bonds, personal loans including consumer loans, home loans, etc. Often banks ask for a premium on Libor rates. Interest rates are quoted as the Libor rate plus premium.