Euro LIBOR

Euro LIBOR
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Methods and techniques


Euro LIBOR (London Interbank Offer Rate) is the euro interest rate used by banks. Banks need to borrow money from each other. They perform this on the London interbank market. LIBOR defines the interest rate at which money is borrowed. As the cost of money for banks is related to LIBOR, European banks often associate Euro LIBOR with interest rate of loans for companies and individuals. An example loan rate can be LIBOR+1 percentage point. That means than bank margin on that loan is 1% point. The rest is cost of borrowing money on the interbank market.

History[edit]

The origin of LIBOR span to 1969. The person considered to be the implementor of LIBOR is Minos Zombanakis (Greek banker). In the mid-1980s banks started to borrow using LIBOR-based contracts. In 1986 British Bankers’ Association (BBA) assumed control of the rate and formalised the governance process and data collection. [1]

“In 1984, the BBA initiated the standardization of contractual terms on interest rate swaps. Two years later, the BBA introduced Libor as a reference rate for a number of securities, notably syndicated loans, futures contracts, and forward rate agreements. Today, Libor serves as a reference rate for unsecured loans between London based banks as well as for many financial instruments that are transacted across the globe.” [2]

LIBOR[edit]

LIBOR interest rates are calculated on daily basis and made public at y 11:30am GMT. It contains five five currencies (Euro, British pound sterling, US dollar, Swiss franc and Japanese yen) and seven borrowing periods starting from overnight to one year. [3] The rates are a benchmark, not the obligatory rate. The trade rate depends on the banks being participants of the trade, their standing, borrowed sum, period, etc.

Federal funds rate[edit]

In US there is similar rate: Federal funds rate. It is “short-term money market interest rate” established by the Federal Open Market Committee (FOMC). In 2007 when the financial crisis began the FOMC reduced the goal of federal funds rate almost to zero. „It then began to use less traditional approaches to implementing policy, including buying very large amounts of longer-term government securities to apply downward pressure on longer-term interest rates.” [4]

References[edit]

  1. Hou D., Skeie D. (2014) LIBOR: Origins, Economics, Crisis, Scandal, and Reform Federal Reserve Bank of New York Staff Reports, No. 667
  2. Abrantes-Metz R. M., Kraten M, Metz A. D., Seow G. S. (2012) Libor manipulation? Journal of Banking & Finance, Vol. 36, No. 1,
  3. Hou D., Skeie D. (2014) LIBOR: Origins, Economics, Crisis, Scandal, and Reform Federal Reserve Bank of New York Staff Reports, No. 667
  4. “The Implementation of Monetary Policy” (2011). The Federal Reserve System: Purposes & Functions Washington, D.C.: Federal Reserve Board

Author: Natalia Pęgiel