What is Libor?
Devised in the 1980s, the London interbank offered rate(Libor) is supposed to be a trusty financial yardstick measuring the cost incurred when banks borrow from each other across 10 major currencies and 15 borrowing periods, ranging from overnight loans to 12-month loans. Set each day, it affects the cost of everything from business-account overdrafts to credit cards to mortgages.
SOUNDS GOOD, THEN WHY THE BARCLAYS BROUHAHA?
Well, banks set their own Libor, and each day tell a central entity how much interest they estimate they would have to pay on such loans.
That entity then eliminates some of the lowest and highest submissions and calculates an average from the remainder. Eighteen banks currently supply data for setting dollardenominated Libor.
According to regulators, Barclays traders sought to skew Libor to benefit their bets. While it might be hard for one bank among many to influence Libor, regulators felt Barclays was sometimes able to do so.
At least 12 banks are involved in the investigations around the world: the Barclays fines may herald similar penalties for other lenders.
SHOULD WE BE WORRIED IN INDIA?
Indian corporates who borrow based on Libor need not worry.
A benchmark will remain at all times since more than $350 trillion worth securities trade with Libor as benchmark. UK regulators working to fix the imbalances.
ARE THERE ANY ALTERNATIVES?
Alternative benchmarks could evolve overtime. Even if someone wants not to benchmark against Libor, they could choose 10 year US treasuries, or other such liquid securitied.
Devised in the 1980s, the London interbank offered rate(Libor) is supposed to be a trusty financial yardstick measuring the cost incurred when banks borrow from each other across 10 major currencies and 15 borrowing periods, ranging from overnight loans to 12-month loans. Set each day, it affects the cost of everything from business-account overdrafts to credit cards to mortgages.
SOUNDS GOOD, THEN WHY THE BARCLAYS BROUHAHA?
Well, banks set their own Libor, and each day tell a central entity how much interest they estimate they would have to pay on such loans.
That entity then eliminates some of the lowest and highest submissions and calculates an average from the remainder. Eighteen banks currently supply data for setting dollardenominated Libor.
According to regulators, Barclays traders sought to skew Libor to benefit their bets. While it might be hard for one bank among many to influence Libor, regulators felt Barclays was sometimes able to do so.
At least 12 banks are involved in the investigations around the world: the Barclays fines may herald similar penalties for other lenders.
SHOULD WE BE WORRIED IN INDIA?
Indian corporates who borrow based on Libor need not worry.
A benchmark will remain at all times since more than $350 trillion worth securities trade with Libor as benchmark. UK regulators working to fix the imbalances.
ARE THERE ANY ALTERNATIVES?
Alternative benchmarks could evolve overtime. Even if someone wants not to benchmark against Libor, they could choose 10 year US treasuries, or other such liquid securitied.
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