In this article, We learn about "LIBOR".Let's Go!
LIBOR, or London Interbank Offered Rate, is the benchmark that determines daily interest rates on loans and financial instruments around the world.
This is the reference rate calculated daily for global banks to lend to each other.
LIBOR is also used as the standard indicator of the market’s expectations for the central bank’s final interest rates.
It reflects the liquidity premium of various instruments traded in the money market, as well as a indicator of the health of the banking system as a whole.
To calculate LIBOR each day, the Intercontinental Exchange (ICE) asks banks around the world to provide the interest rates they offer each other on short-term loans.
ICE takes the highest and lowest number and then averages the remaining numbers.
The results are daily LIBOR data.
LIBOR in five different currencies:
- United States Dollar
- Swiss franc
Each has seven different loan terms:
- Overnight/Next location
- One week
- One month
- Two months
- Three months
- Six months
- Twelve months
The combination of five currencies and seven maturities results in a total of 35 different LIBOR rates calculated and reported every business day.
The most commonly quoted quote is the three-month U.S. dollar rate, which is often referred to as the current LIBOR rate.
Financial companies around the world use LIBOR as the basis to calculate their loan, mortgage, credit card interest rates and financial derivatives prices.
This means LIBOR also affects consumers, not just financial institutions.
While LIBOR is accepted globally, other domestic and regional financial centers set their own interbank rates for domestic loans and financial instruments.
For example, Europe has the European Interbank Offered Rate (EURIBOR), Japan has the Tokyo Interbank Offered Rate (TIBOR), China has the Shanghai Interbank Offered Rate (SHIBOR), and India has the Bombay Interbank Offered Rate (MIBOR).
LIBOR plays a vital role in global financial markets as it helps determine the cost of borrowing and lending for various financial products and transactions.
However, LIBOR has been the subject of some controversy in recent years, including a rate-rigging scandal, which has led to calls to replace LIBOR with an alternative benchmark rate.
As a result, several jurisdictions have introduced new reference rates to replace LIBOR.
For example, the US launched the Secured Overnight Financing Rate (SOFR) as an alternative benchmark, while the UK launched the Sterling Overnight Index Average (SONIA).
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