LIBOR

The Manipulation of LIBOR

LIBOR

Introduction

To understand how the international financial system is necessary to know each of the component parts and operating mechanisms. The key pieces of the global financial system are, of course, banks. And they have certain ways of regulating their mutual relations. The LIBOR rate is one of them.

LIBOR is London Inter Bank rate used as a daily reference rate based on interest rates It wouldl be slightly higher than the London Interbank Bid Rate. The rate is set by the British Bankers Association (British Bankers Association), and the result is released at about 11.00 local time in London (Gongloff, 2010, pp. pp. B.3-B.3).

In October 1984, the British Bankers Association, in conjunction with other entities such as the Bank of England, produced the terms BBAIRS - BBA standard for Interest Swap Rates. Part of this standard included establishing the charges of BBA Interest Settlement, the predecessor of BBA LIBOR. From the September 2, 1985, the terms of BBAIRS became standard practice in the market. BBA LIBOR did not start officially until January 1, 1986, although before some of the rates had been set for a trial period that began in December 1984. Importantly, member banks have an international focus, with more than sixty nations represented in the approximately 200 members (2006).

Calculation of LIBOR rate

The Libor rate is, in general, an average of interest rates that apply to interbank lending of sixteen major banks participating in the system that are also operating with higher values.

LIBOR is used as a reference for other banking operations. For example, the six-month LIBOR rate is taken as reference for mortgages in America, while in England the three-month LIBOR rate also works for the issuance of certain mortgage loans. The LIBOR rate also serves as a reference for the price of various currencies around the globe, such as the dollar, sterling and yen.

The LIBOR interest rate was set as a reference tool in the early 1980, when interbank transactions began to grow exponentially. To standardize the loans and transfers of funds between banks, in 1984 the British Bankers' Association began to take the first steps for the establishment of LIBOR, which effectively became operational in January 1986.

Scope

LIBOR rates are used as a benchmark for financial instruments, such as:

•Short-term interest Rate futures contracts.

•Inflation swaps.

•Syndicated loans.

•Floating rate bonds.

•Currencies, especially the U.S. dollar.

•Interest rate swaps.

• Adjustable rate mortgages.

•Forward rate agreements.

Thus, LIBOR provides the basis for some of the most important financial instruments and liquidity in the world. LIBOR is calculated to influence the cost of U.S. $ 360 trillion financial instruments. For the Euro, however, benchmark rates are the rates Euribor , collected by the European Banking Federation. There is a Euro LIBOR, but it is mainly for continuity purposes in swap contracts (Carsella, 2009, pp. 46-48).

In the 90's, Yen LIBOR rates were altered due to credit problems affecting some of the banks taxpayers. LIBOR of six months is used as an index in some mortgages in the United ...