Euro LIBOR: Difference between revisions
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'''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]]. | '''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== | ==History== | ||
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<ref> Hou D., Skeie D. (2014) ''[https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr667.pdf LIBOR: Origins, Economics, Crisis, Scandal, and Reform]'' Federal Reserve Bank of New York Staff Reports, No. 667 </ref> | |||
"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." <ref> Abrantes-Metz R. M., Kraten M, Metz A. D., Seow G. S. (2012) ''[https://doi.org/10.1016/j.jbankfin.2011.06.014 Libor manipulation?]'' Journal of Banking & Finance, Vol. 36, No. 1, </ref> | |||
==LIBOR== | ==LIBOR== | ||
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<ref> Hou D., Skeie D. (2014) ''[https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr667.pdf LIBOR: Origins, Economics, Crisis, Scandal, and Reform]'' Federal Reserve Bank of New York Staff Reports, No. 667 </ref> 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== | |||
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." <ref> "The Implementation of Monetary Policy" (2011). ''[https://www.federalreserve.gov/aboutthefed/files/pf_3.pdf The Federal Reserve System: Purposes & Functions]'' Washington, D.C.: Federal Reserve [[Board]] </ref> | |||
{{infobox5|list1={{i5link|a=[[TIBOR]]}} — {{i5link|a=[[LIBID]]}} — {{i5link|a=[[Cash bond]]}} — {{i5link|a=[[Lehman formula]]}} — {{i5link|a=[[Fully funded]]}} — {{i5link|a=[[Eurocommercial Paper]]}} — {{i5link|a=[[Negotiable certificate of deposit]]}} — {{i5link|a=[[Creation of money]]}} — {{i5link|a=[[Sinkable bond]]}} }} | |||
==References== | ==References== | ||
* Cajueiro D. O., Tabak B. M. (2007). ''[https://doi.org/10.1016/j.physa.2006.04.110 Long-range dependence and multifractality in the term structure of LIBOR interest rates]'' Physica A: Statistical Mechanics and its Applications, Vol. 373 | * Cajueiro D. O., Tabak B. M. (2007). ''[https://doi.org/10.1016/j.physa.2006.04.110 Long-range dependence and multifractality in the term structure of LIBOR interest rates]'' Physica A: Statistical Mechanics and its Applications, Vol. 373 | ||
* Grbac, Z., Papapantoleon, A., Schoenmakers, J., & Skovmand, D. (2015). ''[https://arxiv.org/pdf/1405.2450 Affine LIBOR models with multiple curves: theory, examples and calibration]''. SIAM Journal on Financial Mathematics, 6(1), 984-1025. | * Grbac, Z., Papapantoleon, A., Schoenmakers, J., & Skovmand, D. (2015). ''[https://arxiv.org/pdf/1405.2450 Affine LIBOR models with multiple curves: theory, examples and calibration]''. SIAM Journal on Financial Mathematics, 6(1), 984-1025. | ||
* McCauley, R. (1999). ''[https://www.bis.org/publ/cgfs11mccau.pdf | * McCauley, R. (1999). ''[https://www.bis.org/publ/cgfs11mccau.pdf The euro and the liquidity of European fixed income markets. ]'' Market Liquidity: Research Findings and Selected Policy Implications, BIS CGFS Publication, (11). | ||
<references /> | <references /> | ||
[[Category:Banking]] | [[Category:Banking]] | ||
{{a|Natalia Pęgiel}} | {{a|Natalia Pęgiel}} | ||
Latest revision as of 20:59, 17 November 2023
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
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
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
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]
| Euro LIBOR — recommended articles |
| TIBOR — LIBID — Cash bond — Lehman formula — Fully funded — Eurocommercial Paper — Negotiable certificate of deposit — Creation of money — Sinkable bond |
References
- Cajueiro D. O., Tabak B. M. (2007). Long-range dependence and multifractality in the term structure of LIBOR interest rates Physica A: Statistical Mechanics and its Applications, Vol. 373
- Grbac, Z., Papapantoleon, A., Schoenmakers, J., & Skovmand, D. (2015). Affine LIBOR models with multiple curves: theory, examples and calibration. SIAM Journal on Financial Mathematics, 6(1), 984-1025.
- McCauley, R. (1999). The euro and the liquidity of European fixed income markets. Market Liquidity: Research Findings and Selected Policy Implications, BIS CGFS Publication, (11).
- ↑ Hou D., Skeie D. (2014) LIBOR: Origins, Economics, Crisis, Scandal, and Reform Federal Reserve Bank of New York Staff Reports, No. 667
- ↑ Abrantes-Metz R. M., Kraten M, Metz A. D., Seow G. S. (2012) Libor manipulation? Journal of Banking & Finance, Vol. 36, No. 1,
- ↑ Hou D., Skeie D. (2014) LIBOR: Origins, Economics, Crisis, Scandal, and Reform Federal Reserve Bank of New York Staff Reports, No. 667
- ↑ "The Implementation of Monetary Policy" (2011). The Federal Reserve System: Purposes & Functions Washington, D.C.: Federal Reserve Board
Author: Natalia Pęgiel
