Libor

In: Historical Events

Submitted By erinmuffoletto
Words 2087
Pages 9
Introduction
Many factors influence the interest rate of a loan. The two greatest factors are the probability of the borrower paying back the loan; and, the “cost” of the money to the lender. As a rational entity, the lender aims to maximize its gain on its assets. When the lender makes a loan to a borrower, it reviews the current market price for money (interest rate). There are various benchmarks used by lenders to determine the market value of loaned money. This memorandum will discuss the London InterBank Offering Rate (LIBOR), one of the most widely used benchmarks, and how it affects our economy.
What is the Libor?
The LIBOR is a widely used measure of the current market price for interest rates. It is defined as “The rate at which an individual contributor panel bank could borrow funds, were it to do so by asking for and then accepting interbank offers in reasonable market size, just prior to 11.00am London time” (British Bankers Association, 2012).
The British Bankers Association (BBA) created the LIBOR in 1985 to provide a measure of the interest rates charged between London banks. The high percentage of financial transactions occurring in London resulted in a broad acceptance of the LIBOR. More than 20% of all international bank lending and more than 30% of foreign exchange transactions take place in London (British Bankers Association, 2012). In essence, the LIBOR is the equilibrium price between banks for lending money.
The LIBOR is produced for several currencies and loan durations. A panel of banks is selected for each currency. The current panel of banks for the U.S. dollar is:
Bank of America
Bank of Tokyo-Mitsubishi UFJ Ltd
Barclays Bank plc
BNP Paribas
Citibank NA
Credit Agricole CIB
Credit Suisse
Deutsche Bank AG
HSBC
JP Morgan Chase
Lloyds Banking Group
Rabobank
Royal Bank of Canada
Société Générale
Sumitomo…...

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