The Libor rate, which is accumulated by Thomson Reuters at the request 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 lack of free cash resources in this market. The interest rate Libor 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, foreign exchange options and forward contracts. And this added significant uncertainty to 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. The binding to the latter at the official level began in January 1986.
The Libor rate is calculated based on benchmarking indicators. This allows you to cover more than 60 countries. Therefore, the Libor rate is widely used by many financial institutions and commercial organizations as a guideline for establishing their own interest for using a loan. In the United States, about 80% of subprime mortgages are tied to it. It should be noted that in this area around the world uses the Libor rate in US dollars. Therefore, the actions of the Fed affect mortgage lending.
Definition
The Libor rate is the average interest on loans in the interbank market, calculated on the basis of a survey of a number of selected financial institutions conducted before 11 a.m. London time. Thus, this indicator takes into account:
- Presentation of the best institutions on the cost of their own free funds in the interbank market.
- The difference in rates in the most used world currencies.
- The value of funds in the London financial markets.
Calculation
Libor is calculated by the Intercontinental Exchange and published by Thomson Reuters. Every day until 11 am London time a survey of a number of banks is conducted regarding their lending rates. The four upper and lower extremes are not taken into account in the calculation. Yet the rest are involved in calculating the average, which is the Libor rate. At 11:30 London time, the Thomson Reuters agency publishes this figure. It is calculated for 7 time periods and five currencies. For example, there is a three-month dollar rate Libor.
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 entered the eurozone. The rate began to be calculated for ten currencies. In 2013, after the scandal, it was decided to reduce the list to five. Today, Libor is calculated for the US dollar, euro, British pound, Japanese yen and Swiss franc.
Until 1998, the shortest crediting period taken into account when calculating this indicator was one month. Then the weekly Libor rate was added. And in 2001 - one day. Following the 2013 reforms, Libor is calculated for seven periods. The longest lending period is twelve months.
