The London Interbank Offered Rate or (LIBOR) has been a rate that has been quoted and used for interest rates for decades. Over the past few years this rate has come under some scrutiny. Look up news related items on the LIBOR scandal. Why was LIBOR an important rate? What was it used for in the past ? Where is it now?
The LIBOR or London Interbank Offered Rate denotes a computed average interest rate at which banks borrow from others within the global financial market. This rate dates back to 1986 by the British Bankers Association. Initially, the LIBOR was used as the default standard interest rate for transactions that involve currency and interest rates for financial firms locally and globally. Continued usage has triggered its change of name to ICE LIBOR. Also, it is now based on five currencies: US dollar, Japanese yen, British Pound, and the Swiss franc, in addition, it has seven maturities translating to thirty-five different rates. In essence this the source of its exceptional importance as a rate (MacKenzie 2008)
To start with it represents the most affordable borrowing rates for banks and financial institutions because it is more stable when compared to the national standards. It is used as a basis from which other rates are established. Moreover, it is the floating rate for interest rate swaps, student loans, corporate funding, and mortgages. It gives a glimpse of what central banks and other financial institutions should expect with regard to rates of borrowing and subsequent developments. Clearly, this rate is a measure of trust and Investors value stability a lot.
To sum it up, despite the current allegations of traders conspiring to influence the final average rate and previous manipulation linked to Barclays bank, a blind eye cannot be turned on a rate anchoring more than $450 trillion worth of investments. MacKenzie (2008) alludes that, failure to accurately compute the rate or will ultimately paralyze business transactions, and it is an illusion to think that substitute rates like transaction-based indices cannot be manipulated, thus let the financial market institutions generate a more strategic and precise measure of setting the LIBOR.
MacKenzie, D. (2008). What’s in a number? The importance of LIBOR. University of Edinburgh, Real-World Economics Review, 47(47), 237-242.
by EssayRoyal, Dec. 10, 2019, 5:06 p.m.