Now that Barclays has admitted that for years it rigged its submissions for the London Interbank Offered Rate, or Libor, it’s probably worth taking a closer look at how this key interest rate benchmark is calculated. (Read: Libor Criminal Investigations Will Happen: Diamond )
Libor may be the most important number in the world. It is certainly the word’s most important interest-rate bench mark. Regulators estimate that Libor is tied to transactions with a notional value of $500 trillion. These include complex derivatives, futures contracts, interest rate swaps, corporate loan agreements, mortgages and even consumer loans.
At its heart, Libor is supposed to be a measure of the borrowing costs of banks.
Libor is actually not just one interest rate. It is the name for rates calculated in 15 currencies for loans of 10 different maturities, ranging from overnight to 12-months. ( See the latest Libor and Treasury/Euro-Dollar credit spreads .)
The setting of Libor begins each morning between 11:00am and 11:10am (London time) when someone in one of the designated Libor panel banks enters a number into a piece of Thomson Reuters software that asks the question: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11am?”Page 1 of 5 | Next Page