LIBOR

London Interbank Offered Rate

Introduction

Definition of 'Interbank Rate' The rate of interest charged on short-term loans made between banks. Banks borrow and lend money in the interbank market in order to manage liquidity and meet the requirements placed on them. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length.

Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential withdrawals from clients. If a bank can't meet these liquidity requirements, it will need to borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market, receiving interest on the assets. There is a wide range of published interbank rates, including the LIBOR, which is set daily based on the average rates on loans made within the London interbank market.

Definition of LIBOR
LIBOR is defined as: "The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time."

This definition is amplified as follows:

The rate at which each bank submits must be formed from that banks perception of its cost of funds in the Interbank market. Contributions must represent rates formed in London and not elsewhere. Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange markets.

 The rates must be submitted by members of staff at a bank with primary responsibility for management of a banks cash, rather than a banks derivative book. The definition of funds is: unsecured interbank cash or cash raised through primary issuance of interbank Certificates of Deposit.

Member banks

Member banks are international in scope, with more than sixty nations represented among its 223 members and 37 associated professional firms as of 2008. Eighteen banks for example currently contribute to the fixing of US Dollar Libor. The panel contains the following member banks:

Bank of America Bank of Tokyo-Mitsubishi UFJ Barclays Bank BNP Paribas Citibank NA Credit Agricole CIB Credit Suisse Deutsche Bank HSBC

JP Morgan Chase Lloyds Banking Rabobank Royal Bank of Canada Socit Gnrale Sumitomo Mitsui Banking The Norinchukin Bank The Royal Bank of Scotland UBS AG

Currency

In 1986, the Libor initially fixed rates for three currencies. These were the U.S. dollar, British pound sterling and Japanese yen. In the years following its introduction there were sixteen currencies. After a number of these currencies in 2000 merged into the euro there remained ten currencies:

Australian dollar (AUD) Canadian dollar (CAD) Swiss franc (CHF) Danish Krone (DKK) Euro (EUR) British pound sterling (GBP) Japanese yen (JPY) New Zealand dollar (NZD) Swedish Krona (SEK) U.S. dollar (USD)

Maturities
Until 1998, the shortest duration rate was one month, after which the rate for one week was added. In 2001, also rates for a day and two weeks were introduced: 1 day 1 week 2 weeks 1 month 2 months 3 months 4 months 5 months 6 months 7 months 8 months 9 months 10 months 11 months 12 months

Technical features

LIBOR is calculated and published by Thomson Reuters on behalf of the British Bankers' Association (BBA) Time of Calculation 11:00 am (and generally around 11:45 am) each day (London time). LIBOR is calculated for 10 currencies. The rates are a benchmark rather than a tradable rate, the actual rate at which banks will lend to one another continues to vary throughout the day. LIBOR is often used as a rate of reference for Pound Sterling and other currencies, including US dollar, Euro,
Japanese Yen, Swiss Franc, Canadian dollar, Australian Dollar, Swedish Krona, Danish Krone and New Zealand dollar.

Determinants of LIBOR

MPC and RPI are important determinants MPC= Monetary Policy Committee RPI= Retail price index the Monetary Policy Committee (MPC) has the policy objective of adjusting UK Interest rates to achieve the target level of inflation MPC Decisions are major instruments of Govt,s Macro economic policy

Continue

MPC set repo rate which is the interest rate implicit in prices at which the BANK OF England is prepared to buy Assets from a bank and sell them back to the same bank about 2 week, later. MPC determine repo rate for the next month. A change in repo rate also affect long term interest Rates. Daily changes in LIBOR ( Lt ) were regressed on a set of nine macroeconomic variables

Continue
1. 2. 3. 4.

5.
6. 7. 8. 9.

Unexpected Increase in Repo Rate Unexpected Decrease in Repo Rate Unexpected changes in Index of Production Unexpected changes in Retail Price index Unexpected changes in Money supply Unexpected changes in consumer credit Unexpected changes in Earnings Unexpected changes in Producer prices Unexpected changes in Retail sales

References

[1] What Is a Libor Mortgage? (http:/ / www. mtgprofessor. com/ Tutorials2/ libor_loan_tutorial. htm) [2] http:/ / www. snb. ch/ en/ mmr/ speeches/ id/ ref_20090825_tjn_1/ source/ ref_20090825_tjn_1. en. Pdf [3] www.bba.org.uk (http:/ / www. bba. org. uk/ bba/ jsp/ polopoly. jsp?d=225& a=1416) [4] http:/ / www. bba. org. uk/ bba/ jsp/ polopoly. jsp?d=225& a=1413 [5] Mollenkamp, Carrick; Whitehouse, Mark (29 May 2008). "Study Casts Doubt on Key Rate - WSJ.com" (http:/ / online. wsj. com/ article/ SB121200703762027135. html?mod=MKTW). The Wall Street Journal. .