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More on LIBOR
The London Interbank Offered Rates (LIBOR) can be described
as the wholesale cost of money in the London interbank money
market. Though the LIBOR rates are fixed in the United Kingdom,
American consumers need to understand how LIBOR works, since
LIBOR is used as an index in the pricing of many types of
consumer loans in the United States.
How LIBOR Works
LIBOR is the average interest rate at which a select group
of banks that participate in the London interbank money market
can borrow unsecured funds from each other. There are many
different LIBOR rates (maturities range from overnight to
12 months) for numerous currencies, including Eurodollars.
A Eurodollar is an American dollar on deposit in any bank
outside the United States, and is therefore not subject to
regulation by the U.S. Federal Reserve or any other American
regulating body.
LIBOR rates are fixed every UK business day by the ICE
Benchmark Administration (IBA).
Just before 11:00 a.m. GMT, the IBA polls a specific panel
of highly reputable, high-volume banks which participate in
the London wholesale money market. The IBA finds out the rate
at which each bank on the panel could borrow Eurodollars from
other banks, for specific maturities. The question posed is:
"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 11 a.m.?”
The IBA figures out the trimmed arithmetic mean for
each maturity, then publishes these rates at about 11:45 a.m.
GMT.
Three American banks are included in the panel surveyed by
the IBA for Eurodollar fixing: Citibank, Bank of America and
JP Morgan Chase. There are also 15 non-U.S. banks surveyed
for Eurodollar fixing in London, bringing the total Eurodollar
panel count to 18. To get the trimmed arithmetic mean for
each maturity, the IBA starts with the 18 rates, discards
the highest and lowest 25%, then determines the average of
the remaining.
Back in the mid-1980's, the international banking system
adopted LIBOR as a much needed benchmark for short-term, interbank
loans. The LIBOR rates are now globally recognized indexes
used for pricing many types of consumer and corporate loans,
debt instruments and debt securities across the globe. For
example, LIBOR is used as a benchmark for many student loans
and mortgages in The United States.
LIBOR is administered by the IBA, and regulated by the Financial
Conduct Authority (FCA).
copyright © 2019 Steve
"AmCy" Brown, www.FedPrimeRate.com
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