The London Inter-Bank Offered Rate
Recently, the Reserve Bank of India (RBI) has asked banks and financial institutions to end their dependence on the London Interbank Offer Rate (Libor) by 1 July.
This is a benchmark interest rate, on which major global banks lend to each other in the International Interbank market for short -term loans. It acts as a benchmark for short -term interest rates.
It also serves as a base for corporate and government bonds, mortgage, student loan, credit cards, derivatives and other financial products.
Libor is administered by the Intercontinental Exchange (Ice). It is calculated for five postures, which have seven different maturity, which range from one night to one year.
The five currencies for which Libor are calculated are Swiss Frank, Euro, Pound Sterling, Japanese Yen and US Dollars.
Why is Libor being abolished?
- It played a role in the 2008 financial crisis as well as the scams associated with Libor manipulation among banks determining the rate.
- Libor has become more sensitive to short -term market liquidity and value volatility that can cause systemic risk.
- The safe overnight financing rate (SOFR) is widely being used as an alternative to Libor worldwide.
Source – Indian Express
