Everything you need to know about LIBOR

Everything you need to know about LIBOR

Everything you need to know about LIBOR

The London Interbank Offered Rate, or LIBOR for short, is an important reference interest rate used to calculate interest rates for a variety of financial instruments and products. In this article, we will explain everything about LIBOR, from its meaning and how it came about to what it means for consumers and the economy.

What is LIBOR?

LIBOR is a daily reference interest rate that reflects the average interest rate at which a group of leading banks can lend to each other. It is published in five currencies and seven maturities and is used as a basis for setting interest rates on a wide range of financial products, including mortgages, corporate loans and derivatives.

Creation of LIBOR

LIBOR was developed in the 1980s when a need arose for a standardized reference interest rate for the global financial market. A group of banks in London began reporting daily interest rates, which were then combined into an aggregate average rate. LIBOR quickly became an important tool for setting interest rates in the global financial industry.

Why is LIBOR important?

LIBOR is important because it serves as a reference rate for a variety of financial products. Many credit agreements, derivatives and other financial instruments are based on LIBOR and its various maturities and currencies. Changes in LIBOR can therefore have a direct impact on the cost of borrowing and the returns on investments.

The future of LIBOR

Recently, LIBOR has come under fire due to scandals and allegations of manipulation. Regulators around the world have taken action to reform LIBOR and it is expected to be replaced by alternative benchmark rates by 2021. This development has far-reaching effects on the financial industry and requires companies and financial institutions to adapt to the new interest rates.

Conclusion

LIBOR is an important reference interest rate that plays a central role in the global financial system. Its importance extends to a wide range of financial products and has a direct impact on consumers, businesses and the wider economy. With reforms on the horizon, it is crucial to be informed about the future of LIBOR and prepare for the upcoming changes.

Frequently asked questions

What are the effects of LIBOR reform?

LIBOR reform will have far-reaching impacts on the financial industry as it changes the fundamental basis for setting interest rates in a wide range of financial products. Companies and financial institutions must prepare for the transition to alternative reference interest rates and adapt their existing contracts and products.

Which alternative reference interest rates will replace LIBOR?

There are several alternative benchmark interest rates that have been proposed as replacements for LIBOR, including the American SOFR (Secured Overnight Financing Rate) and the British SONIA (Sterling Overnight Index Average). These new interest rates are transaction-based and offer more transparency and reliability than the previous LIBOR.

How will consumers be affected by the end of LIBOR?

Consumers may be affected by changes in mortgage rates, credit card rates and other financial products based on LIBOR as a result of the end of LIBOR. Banks and lenders will have to adapt their products and contracts to the new reference interest rates, which may lead to changes in the costs of loans and investments.