ICE LIBOR, which stands for the
International Exchange London Interbank Offered Rate, is a set of daily average
rates at which banks say they borrow money from one another. Usually just
called the LIBOR, these benchmark rates are widely used as a base interest
rates by financial institutions all over the world. As such, the LIBOR rates
impact almost all players in the financial world from student loans holders,
mortgage holders, and small business owners to corporations and the world’s
largest banks.
Understanding
LIBOR
LIBOR
offers daily average interest rates for five currencies (the U.S. dollar, euro,
British pound, Japanese yen, and Swiss franc) and seven lending periods
(ranging from overnight to 12 months). In total, there are 35 different daily
LIBOR rates. LIBOR is governed by the International Exchange (ICE) Benchmark
Administration. The Administration calculcates the LIBOR rates every day by
surveying participating banks.
Every
morning, the ICE Benchmark Administration asks a panel of contributor banks
(usually 11 to 18 large, international banks) to answer the following question:
“At what rate could you borrow funds, were you to do so by asking for and then
accepting interbank offers in a reasonable market size just prior to 11 am
London time?” Banks provide different answers based on the currency and the
length of the loan. The rates quoted by banks are annualized interest rates.
The ICE Benchmark Association uses these rates to calculate LIBOR using a
method called trimmed arithmetic mean wherein the extreme
values are excluded. (Related reading: What Is ICE LIBOR And What Is It Used For?)
Why
Is LIBOR So Important?
The
five-letter acronym, LIBOR, stands for London Interbank Offered Rate, but its
significance spreads far beyond the City of London or even Europe. Indeed, the
LIBOR rate it is one of the most globally significant numbers in finance. Banks,
financial institutions, and credit agencies all over the world look to LIBOR to
set their own interest rates. There are currently outstanding contracts worth
trillions of dollars spread across different maturities from overnight to 30
years that all reference the benchmark LIBOR. According to the UK Treasury, the
value of financial contracts tied to LIBOR touches $300 trillion. However, this
does not include consumer loans or adjustable rate home mortgages. According to
the ICE Benchmark Administration, “In total, hundreds of trillions of dollars’
worth of interest rate exposure is tied to ICE LIBOR.”
One of the
main reasons LIBOR is used so widely is because of the way the rate is
calculated and constructed. LIBOR represents the lowest borrowing rate among
banks and big financial institutions. Other rates are fixed on top of the
LIBOR. This is often expressed as “LIBOR + X bps” where, bps stands for basis point and X is the premium charged
over and above the LIBOR rate by the lender to the borrower. Thus any increase
or decrease in the base rate (which is the LIBOR rate) impacts contracts tied
to LIBOR or based on it as a benchmark.
LIBOR is
commonly used as the floating rate for interest rate swaps, future contracts,
mortgages, student loans, and even corporate funding. LIBOR is also used for
setting the settlement prices for interest rate future contracts that help
companies to hedge interest rate exposure. LIBOR provides a fair idea to
central banks and other important institutions about the expectations on
interest rates and linked developments.
The
Bottom Line
Until
January 31, 2014, the ICE LIBOR was known as the BBA LIBOR (for British Banker’s Association). BBA LIBOR
came under fire when Barclays and few other institutions were investigated for
manipulating the benchmark rate by submitting false borrowing rates to the
British Banker’s Association. This shook the credibility of LIBOR in the
financial markets. However, trust in the LIBOR was soon restored when
governance was transferred to the ICE Benchmark Administration. Though LIBOR
has endured controversies, its daily borrowing rates continue to be some of the
most important numbers in finance. (Related reading: Why BBA LIBOR Was Replaced By ICE LIBOR)
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Source
:
http://www.investopedia.com/articles/investing/061115/importance-libor-financial-markets.asp
5W + 1H
1. What
the contents of the above news?
The Importance Of LIBOR In
Financial Markets
2.
When LIBOR offers daily
average interest rates for five currencies and seven lending periods?
ranging from overnight to 12 months
3.
Where is ICE LIBOR place ?
In
London
4.
Who get impact from the LIBOR rates?
the LIBOR rates impact almost all players in the financial world from
student loans holders, mortgage holders, and small business owners to
corporations and the world’s largest banks.
5.
Why LIBOR is used so widely?
Is because LIBOR represents the lowest borrowing rate among banks and big
financial institutions.
6.
How BBA LIBOR came under
fire?
BBA LIBOR came under fire when Barclays and few other institutions were
investigated for manipulating the benchmark rate by submitting false borrowing
rates to the British Banker’s Association.
