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More on LIBOR
The London Interbank Offered Rates (LIBOR) can be described
as the wholesale cost of money in the London interbank money
market. Though the LIBOR rates are fixed in the United Kingdom,
American consumers need to understand how LIBOR works, since
LIBOR is used as an index in the pricing of many types of
consumer loans in the United States.
How LIBOR Works
LIBOR is the average interest rate charged when banks in
the London interbank money market borrow unsecured funds from
each other. There are many different LIBOR rates (maturities
range from overnight to 12 months) for numerous currencies,
including Eurodollars. A Eurodollar is an American dollar
on deposit in any bank outside the United States, and is therefore
not subject to regulation by the U.S. Federal Reserve.
LIBOR rates are fixed every UK business day by the international
media company Thomson Reuters, in association with the British
Bankers' Association (BBA), a not-for-profit trade association.
Just before 11:00 a.m. GMT, the BBA polls a specific panel
of highly reputable, high-volume banks which participate in
the London wholesale money market. The BBA finds out the rate
at which each bank on the panel could borrow Eurodollars from
other banks, for specific maturities. The BBA figures out
the central tendency -- the interquartile mean -- for each
maturity, then publishes these rates at about 11:30 a.m. GMT.
Three American banks are included in the panel surveyed by
the BBA for Eurodollar fixing: Citibank, Bank of America and
JP Morgan Chase. There are also 13 non-U.S. banks surveyed
for Eurodollar fixing in London, bringing the total Eurodollar
panel count to 16. To get the interquartile mean for each
maturity, the BBA starts with the 16 rates, discards the four
lowest and four highest rates, then determines the average
of the remaining 8 rates.
Back in the mid-1980's, the international banking system
adopted LIBOR as a much needed benchmark for short-term, interbank
loans. The LIBOR rates are now globally recognized indexes
used for pricing many types of consumer and corporate loans,
debt instruments and debt securities across the globe. For
example, LIBOR is used as a benchmark for the vast majority
of interest-only loans in The United States.
Copyright © 2009 Steve
"AmCy" Brown, www.FedPrimeRate.com
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