Libor: history of origin, calculation

The Libor rate, which is accumulated by Thomson Reuters at the request of the Intercontinental Exchange (ICE), is an important indicator of the state of the financial system. It represents the average interest rate on interbank loans. Its growth speaks about the lack of free monetary resources in this market. The Libor interest rate is calculated for five currencies and seven credit periods. Many financial institutions use it in their own calculations, focusing on it in their own activities.

History of occurrence

In the early 1980s, many new financial instruments appeared on the market, such as interest rate swaps, foreign exchange options and forward contracts. And this brought considerable uncertainty to all attempts to predict the development of the system. In October 1984, the British Banking Association introduced a standard for interest rate swaps. And he became the predecessor of Libor. The link to the latter at the official level began in January 1986.

The Libor rate is calculated on the basis of the benchmark indicators. This allows us to cover more than 60 states. Therefore, Libor rate is widely used by many financial institutions and commercial organizations as a benchmark for setting own interest rates for the use of credit. In the United States of America, about 80% of subprime mortgage loans are tied to it. It should be noted that in this area around the world the Libor rate is used in US dollars. Therefore, the actions of the Federal Reserve affect mortgage lending.

Definition

The Libor rate is the average interest rate on loans in the interbank market, calculated on the basis of a survey of a number of selected financial institutions conducted before 11 am London time. Thus, this indicator takes into account:

• Representation of the best institutions on the value of their own free funds in the interbank market.
• The difference in rates in the world's most used currencies.
• The value of funds on the London financial markets.

Calculation

Libor is calculated by the Intercontinental Exchange and published by Thomson Reuters. Every day until 11 am London time, a number of banks are surveyed regarding their lending rates. The four upper and lower extremes are not taken into account in the calculation. Yet the rest participate in the calculation of the average, which is the Libor rate. At 11:30 London time Thomson Reuters publishes this indicator. It is calculated for 7 time periods and five currencies. For example, there is Libor's three-month dollar rate.

In 1986, this indicator was calculated for three currencies - the dollar, the British pound and the German mark. Then for sixteen. In 2000, many countries entered the euro area. The rate began to be calculated for ten currencies. In 2013, after the scandal, it was decided to reduce the list to five. To date, Libor is calculated for the US dollar, the euro, the British pound, the Japanese yen and the Swiss franc.

Until 1998, the shortest period of credit, taken into account in calculating this indicator, was one month. Then, weekly rate Libor was added. And in 2001 - one day. After the reforms of 2013, Libor is calculated for seven periods. The longest crediting period is twelve months.

Scandal

In June 2012, during the investigation, numerous fraudulent actions by the reference banks for rigging the Libor rate were discovered. The first suspicions about the truthfulness of the information they provided arose in 2008. The falsification of indicators for calculating the Libor rate during this period is even called one of the causes of the global financial crisis. In 2013, a number of serious reforms of this indicator came into force, designed to increase its transparency and prevent the incorrect mapping of the state of the global financial system.