The Libor rate, information about which is accumulated by Thomson Reuters on the order of the Intercontinental Exchange (ICE), is an important indicator of the state of the financial system. It represents the average interest rate on interbank loans. Its growth indicates the absence of free financial resources in this market. The Libor interest rate is calculated for five currencies and seven credit periods. Many financial institutions use it in their own calculations, focusing on it in their own activities.
History of occurrence
In the early 1980s, many new financial instruments appeared on the market, such as interest rate swaps, currency options and forward contracts. And this introduced significant uncertainty in all attempts to predict the development of the system. In October 1984, the British Banking Association introduced a standard for interest rate swaps. And he became the forerunner of Libor. Linking to the latter at the official level began in January 1986.
The Libor rate is calculated based on the performance of banks-landmarks. This allows you to cover more than 60 states. Therefore, the Libor rate is widely used by many financial institutions and commercial organizations as a benchmark for setting their own interest for using a loan. In the United States, about 80% of subprime mortgages are linked to it. It should be noted that in this area the Libor rate in US dollars is used all over the world. Therefore, mortgage lending is affected by the actions of the Fed.
Definition
The Libor rate is the average interest rate on loans in the interbank market, calculated from a survey of a number of selected financial institutions conducted before 11 am London time. Thus, this indicator takes into account:
- Representation of the best institutions on the value of their own free funds in the interbank market.
- The difference in rates in the most used world currencies.
- Value of funds in London financial markets.
Calculation
Libor is calculated by the Intercontinental Exchange and published by Thomson Reuters. Every day until 11 am London time, a number of banks are polled regarding their lending rate. The four upper and lower extrema are not taken into account in the calculation. All the rest participate in the calculation of the average, which is the Libor rate. At 11:30 London time, Thomson Reuters publishes this figure. It is calculated for 7 time periods and five currencies. For example, there is a three-month dollar rateLibor.
In 1986, this indicator was calculated for three currencies - the dollar, the British pound and the German mark. Then - for sixteen. In 2000, many countries joined the Eurozone. The rate began to be calculated for ten currencies. In 2013, after a scandal, it was decided to reduce the list to five. Libor is currently calculated for the US dollar, euro, British pound, Japanese yen and Swiss franc.
Before 1998, the shortest credit period taken into account in calculating this indicator was one month. Then the weekly Libor rate was added. And in 2001 - one-day. Since the reforms of 2013, the Libor is calculated for seven periods. The longest loan period is twelve months.
Scandal
In June 2012, the investigation uncovered numerous fraudulent activities by reference banks to falsify the Libor rate. The first suspicions about the veracity of the information they provide arose as early as 2008. The falsification of indicators for calculating the Libor rate during this period is even called one of the causes of the global financial crisis. In 2013, a number of major reforms to this indicator came into force, designed to increase its transparency and prevent misrepresentation of the state of the global financial system.
