London Interbank Offered Rate Essay

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London Interbank Offered Rate (LIBOR), is the average interest rate estimated by the leading banks in London and it is widely used as a criterion that banks charge each other for borrowing or lending. LIBOR is calculated every day at 11 a.m. U.K. time by Thomson Reuters Corporation for 15 borrowing terms that range from overnight to one year. Data submitted by the participated banks are used to determine the rates. Once the rates are submitted, Thomson Reuters takes out the 4 highest and the 4 lowest, then take the mean of the rest as the LIBOR rate. According to John Kiff (Dec, 2012), a U.K Treasury Report shows that $300 trillion in financial contract are tied to LIBOR - and that doesn’t include rates on uncounted tens of billions of dollars …show more content…
(Michael J., July 2012) ₍₃₎ Sadly, in June 2012, Barclays bank admitted to improper handling of the interest rates which has a direct impact on the LIBOR. Barclays was then fined with U.S. $453 millions to settle the affirmation which it had methodically manipulated the LIBOR between the year 2005 and 2009. According to Wharton finance professor Richard J. Herring, the scandal derives from the fundamental problem in which LIBOR is only a hypothetical rate but not a transaction rate. ₍₄₎ If a bank has the attempt to control over the LIBOR, it may submit a false low rate to make one of the panel bank 's rate which supposed to stay in the bottom quarter to go up to the middle quarter of the range, so that the rate will be used in the calculation of LIBOR instead of being taken away from the range. Then a low LIBOR rate will be generated. Despite of the possibility that the rate quoted by each bank can be known, to examine and check on the LIBOR rate quoted by each of the participated bank against an actual transaction seems to be an impossible …show more content…
Despite of the scandal that happened, LIBOR still being so significant worldwide. Since everyone around the world is using LIBOR as a benchmark of the interest rates in various kind of financial products, a small change in LIBOR or a fraud that happen in LIBOR may link to instability of the entire financial system. An increase in LIBOR will lead to an increase in mortgage payment, loan repayment and etc. Indeed, when the LIBOR decreases, your mortgage payment or student loan repayment falls too. Furthermore, anyone in the world can use LIBOR as the indicator for the interest rates on their financial activities like swaps, futures and

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