Libor stands for London Interbank Offer Rate | MBA in Project Management in Bangalore

Posted by Prof. Sibananda Das On 17/09/2022 08:13:18

Libor stands for London Interbank Offer Rate, It is basically a benchmark reference rate or we can say an Index rate just like Sensex is a benchmark about how the stocks are performing in the stock exchange similarly this reference rate of Libor gives an indication of movement of banks rate in London. For example, if a bank has to provide a loan to a corporate then it has to consider a benchmark defined rate code adjusting the spread accordingly, it just cannot exercise a random rate. It is defined as a rate code in CBS and updated daily and then uploaded to the system based on the rate code the loans and their schedules are calculated.

LIBOR or London Interbank offer to rate The London Interbank Offered Rate (LIBOR) dates back to the 1970s as a reference interest rate for transactions in offshore Euro-dollar markets. In 1984, it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably interest rate swaps, foreign currency options, and forward rate agreements. While recognizing that such instruments brought more business and greater depth to the London Inter-bank market, bankers worried that future growth could be inhibited unless a measure of uniformity was introduced. In October 1984, the British Bankers' Association (BBA)—working with other parties, such as the Bank of England—established various working parties, which eventually culminated in the production of the BBA standard for interest rate swaps, or "BBAIRS" terms. Part of this standard included the fixing of BBA interest-settlement rates, the predecessor of BBA Libor. From 2 September 1985, the BBAIRS terms became standard market practice. BBA Libor fixings did not commence officially before 1 January 1986. Before that date, however, some rates were fixed for a trial period commencing in December 1984. Libor calculations

  • · Every day 18 international banks submit their ideas of the rates at which they should borrow money from another bank on the interbank lending market in London. It is an anticipated rate which is very important; this is not something which exactly not happened it is the idea of the rate.
  •  · Earlier we had BBA British banking association now its been replaced with IC exchange which takes care of getting rates from various banks in which the top 4 and bottom 4 rates is removed and then the average is calculated of the rest.
Particulars in calculations of LIBOR BANK A BANK B BANK C BANK D
Panel of banks submit their rates       1%      2%     3%      4%
The Top and bottom qualities are discarded       1%      2%     3%      4%

An average is calculated of the remainder on the rates given by Banks

     2.5%

Libor

Finalised

As the bottom and top is discarded so, in this case, Bank A & D is discarded and from 2% and 3 % Libor is calculated as 2.5% is the libor rate for the day and this is dwelled into various core banking system software’s.

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