Friday, July 19

LIBOR


LIBOR

LIBOR stands for London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged while borrowing from other banks. It is the primary benchmark, along with the Euribor, for short term interest rates around the world. As a popular benchmark, it is used for US Dollar, GB Pound, Euro, Swiss Franc, Canadian Dollar and Japanese Yen.

Libor rates are calculated for ten currencies and 15 borrowing periods ranging from overnight to one year and are published daily at 11:30 am (London time) by Thomson Reuters. The British Bankers Association (BBA) collects data from 16 banks to calculate LIBOR for each maturity and for each currency. It weeds out the best four and the worst four and then calculates the average of remaining 8 rates which is published as LIBOR.

Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products are tied to the Libor.

Recently three major banks – Barclays, Royal bank of Scotland (RBS) and UBS were fined $2.5 billion by authorities in London and US for rigging Libor rates.
 

The Indian equivalent of LIBOR is MIBOR – Mumbai Interbank Offered Rate. It is calculated by National Stock Exchange (NSE) and Thomson Reuters. NSE calculates it based on rates provided by 31 banks / financial institutions and primary dealers. MIBOR has gained some importance in terms of being a benchmark for swaps, forward rate agreements (FRAs), term deposits and floating rate debentures.

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