Libor or Liebor?

LIBOR or LIEBOR?

The recent London Interbank Offered Rate ( LIBOR) scandal has cost Barclays heavily with its top 3 officials including the CEO Bob Diamond resigning from the firm. Before digging into the LIBOR scandal, let us first get an insight into what LIBOR is all about.

What is Libor?

LIBOR, or the London Interbank Offered Rate, is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks in the London interbank market. Libor is calculated and published by Thomson Reuters on behalf of the British Banker’s Association (BBA) after 11:00 AM (and generally around 11:45 AM) each day (London time). LIBOR is calculated by BBA daily wherein they survey variety of banks that represent the general market. The BBA then surveys different banks’ interbank interest rate quotes. The rate at which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market. The top and bottom values of the quotes are discarded and the remaining interest rate quotes are averaged to form the daily LIBOR. LIBOR rates are provided for period up to 12 months. LIBOR rates are provided in 10 currencies namely US dollar , euro , Japanese yen , Swiss franc , Canadian dollar , Australian dollar, Swedish Krona , Danish krone , New Zealand Dollar. There are ten LIBOR panels, one for each of the ten currencies for which the rate is determined. Each panel is composed of at least eight contributor banks, chosen for their reputations and their perceived expertise in a given currency.

Why is Libor significant?

Not only does LIBOR provide information about the cost of borrowing in different currencies, it actually influences it. Banks look at it every day to figure out what they should charge for not just home loans, but car loans, commercial loans, credit cards. LIBOR ends