Libor Rate Là Gì

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What Is London Interbank Offered Rate (LIBOR)?

The London Interbank Offered Rate (LIBOR) is abenchmark interestrate at which major global banks lend lớn one another in the international interbank market for short-term loans.

LIBOR, which stands for London Interbank Offered Rate, serves as a globally accepted key benchmark interest rate that indicates borrowing costs between banks. The rate is calculated & will continue khổng lồ be published each day by the Intercontinental Exchange (ICE), but due khổng lồ recent scandals and questions around its validity as a benchmark rate, it is being phased out. According lớn the Federal Reserve & regulators in the UK, LIBOR will be phased out by June 30, 2023, & will be replaced by the Secured Overnight Financing Rate (SOFR). As part of this phase-out, LIBOR one-week và two-month USD LIBOR rates will no longer be published after Dec. 31, 2021.

LIBOR is the benchmark interest rate at which major global banks lend to one another.LIBOR is administered by the Intercontinental Exchange, which asks major global banks how much they would charge other banks for short-term loans.The rate is calculated using the Waterfall Methodology, a standardized, transaction-based, data-driven, layered method.LIBOR has been subject to manipulation, scandal, and methodological critique, making it less credible today as a benchmark rate.LIBOR is being replaced by the Secured Overnight Financing Rate (SOFR) on June 30, 2023, with phase-out of its use beginning after 2021.

Understanding LIBOR

LIBOR is the average interest rate at which major global banks borrow from one another. It is based on five currencies including the U.S. Dollar,the euro,the British pound, the Japanese yen, và the Swiss franc, and serves seven different maturities—overnight/spot next, one week, and one, two, three, six, & 12 months.

The combination of five currencies and seven maturities leads lớn a total of 35 different LIBOR rates calculated & reported each business day. The most commonly quoted rate is the three-month U.S. Dollar rate, usually referred to lớn as the current LIBOR rate.

Each day, ICE asks major global banks how much they would charge other banks for short-term loans. The association takes out the highest và lowest figures, then calculates the average from the remaining numbers. This is known as the trimmed average. This rate is posted each morning as the daily rate, so it's not a static figure. Once the rates for each maturity and currency are calculated and finalized, they are announced & published once a day at around 11:55 a.m. London time by the ICE Benchmark Administration (IBA).

LIBOR is also the basis for consumer loans in countries around the world, so it impacts consumers just as much as it does financial institutions. The interest rates on various credit products such as credit cards, oto loans, & adjustable-rate mortgages fluctuate based on the interbank rate. This change in rate helps determine the ease of borrowing between banks và consumers.

But there is a downside to lớn using the LIBOR rate. Even though lower borrowing costs may be attractive lớn consumers, it does also affect the returns on certain securities. Some mutual funds may be attached to LIBOR, so their yields may drop as LIBOR fluctuates.

How Is LIBOR Calculated?

The IBA has constituted a designated panel of global banks for each currency & tenor pair. For example, 16 major banks, including bank of America, Barclays, Citibank, Deutsche Bank, JPMorgan Chase, and UBS constitute the panel for U.S. Dollar LIBOR. Only those banks that have a significant role in the London market are considered eligible for membership on the ICE LIBOR panel, & the selection process is held annually.

As of April 2018, the IBA submitted a new proposal lớn strengthen the LIBOR calculation methodology. It suggested using a standardized, transaction-based, data-driven, layered method called the Waterfall Methodology for determining LIBOR.

The second transaction-derived cấp độ involved taking submissions based on transaction-derived data from a panel ngân hàng if it does not have a sufficient number of eligible transactions lớn make a level 1 submission.The third level—expert judgment—comes into play when a panel bank fails to make a màn chơi 1 or a level 2 submission. It submits the rate at which it could finance itself at 11:00 a.m. London time with reference lớn the unsecured, wholesale funding market.

The IBA calculates the LIBOR rate using atrimmedmean approach applied to lớn all the responses received. Trimmed mean is a method of averaging, which eliminates a small specified percentage of the largest và smallest values before calculating the mean. For LIBOR, figures in the highest and lowestquartileare thrown out, & averaging is performed on the remaining numbers.

Uses of LIBOR

LIBOR is used worldwide in a wide variety of financial products. They include the following:

LIBOR is also used as a standard gauge of market expectation for interest rates finalized by central banks. It accounts for the liquidity premiums for various instruments traded in the money markets, as well as an indicator of the health of the overall banking system. A lot of derivative products are created, launched, and traded in reference lớn LIBOR. LIBOR is also used as a reference rate for other standard processes lượt thích clearing, price discovery, & product valuation.

A Brief History of LIBOR

The need for a uniform measure of interest rates across financial institutions became necessary as the market for interest rate-based products began evolving during the 1980s. The British Bankers’ Association (BBA)—which represented the banking và financial services industry—set up BBA interest-settlement rates in 1984. Further streamlining led khổng lồ the evolution of BBA LIBOR in 1986, which became the mặc định standard interest rate for transacting in the interest rate- and currency-based financial dealings between financial institutions at the local and international levels.

Since then, LIBOR has undergone many changes. The major one is when BBALIBOR changed khổng lồ ICE LIBOR in February 2014 after the Intercontinental Exchange took over the administration.

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Currencies involved in calculating LIBOR have also changed. While new currency rates have been added, many have been removed or integrated following the introduction of the euro rates. The 2008 financial crisis saw a significant decline in the number of tenors for which LIBOR was calculated.

LIBOR Equivalents

Though LIBOR is accepted globally, there are other similar regional interest rates that are popularly followed across the globe.

For instance, Europe has theEuropean Interbank Offered Rate(EURIBOR), japan has theTokyo Interbank Offered Rate(TIBOR), china has Shanghai Interbank Offered Rate (SHIBOR),and India has the Mumbai Interbank Offered Rate (MIBOR).

LIBOR Scandal of Rate Rigging

While LIBOR has been a long-established global benchmark standard for interest rates, it has had its fair share of controversies including a major scandal of rate rigging. Major banks allegedly colluded to lớn manipulate the LIBOR rates. They took traders" requests into account và submitted artificially low LIBOR rates to lớn keep them at their preferred levels. Theintention behind the alleged malpractice was khổng lồ bump up traders’ profits who were holding positions in LIBOR-based financial securities.

Following reporting by the Wall Street Journal in 2008, major global banks, which were on the panels & contributed khổng lồ the LIBOR determination process, faced regulatory scrutiny. It involved investigations by the U.S. Department of Justice. Similar investigations were launched in other parts of the globe including in the U.K. Và Europe. Major banks và financial institutions including Barclays, ICAP, Rabobank, Royal bank of Scotland, UBS, & Deutsche bank faced heavy fines. Punitive actions were also taken on their employees who were found to be involved in the malpractice. The scandal was also one of the primary reasons why LIBOR shifted from BBA administration lớn ICE.

Special Considerations: Phasing Out LIBOR

Although LIBOR has been used since the 1980s, regulatory reforms have begun in recent years khổng lồ reform benchmark rates & ultimately replace LIBOR as the interbank borrowing rate. It's expected that U.K. Regulators will no longer require banks khổng lồ publish LIBOR rates after 2021.

The new system is designed lớn replace the conjecture surrounding interest rates that was predominant under LIBOR & instead use actual transaction rates. The secured overnight financing rate (SOFR) will replace LIBOR in 2023. The SOFR is also a benchmark interest rate used for dollar-denominated loans và derivative contracts. SOFR is different than LIBOR in that it"s based on actual observed transactions in the U.S. Treasury market while LIBOR used estimations of borrowing rates.

However, SOFR is likely lớn be used in the U.S. And the U.K. But other countries are exploring using their own version of a benchmark rate for when LIBOR is phased out.

Examples of LIBOR-Based Products and Transactions

The most straightforward example of a LIBOR-based transaction is a floating rate bond, which pays an annual interest based on LIBOR, say at LIBOR + 0.5%. As the value of LIBOR changes, the interest payment will change.

LIBOR also applies to interest rate swaps—contractual agreements between two parties to exchange interest payments at a specified time. Assume Paul owns a $1 million investment that pays him a variable LIBOR-based interest rate equal to lớn LIBOR + 1% each quarter. Since his earnings are subject khổng lồ LIBOR values and are variable in nature, he wants lớn switch lớn fixed-rate interest payments. Then there is Peter, who has a similar $1 million investment, which pays him a fixed interest of 1.5% per quarter. He wishes to get a variable earning, as it may occasionally give him higher payments.

Both Paul & Peter can enter into a swap agreement, exchanging their respective interest receipts. Paul will receive the fixed 1.5% interest over his $1 million investment from Peter, which equals $15,000 while Peter receives LIBOR + 1% variable interest from Paul.

If LIBOR is 1%, then Peter will receive 2% or $20,000 from Paul. Since this figure is higher than what he owes khổng lồ Paul, in net terms, Peter will get $5,000 ($20,000 - $15,000) from Paul. By next quarter, if LIBOR comes down lớn 0.25%, Peter will be eligible to receive 1.25% or $12,500 from Paul. In net terms, Paul will get $2,500 ($15,000 - $12,500) from Peter.

Such swaps essentially fulfill the requirement of both the transacting parties who wanted lớn change the type of interest receipts (fixed and floating).

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