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Dr. P.V. Viswanath |
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Fall 2012 |
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3. See http://citywire.co.uk/money/qanda-what-is-libor-and-what-did-barclays-do-to-it/a600479/3. There are 150 different Libor rates calculated on a daily basis by Thomson Reuters for 15 borrowing periods ranging from overnight to 12 months, spanning 10 different currencies. These rates are calculated based on data submitted by a panel of major banks – the number of banks on the panel varies according to the currency. The UK’s sterling rate, for example, is based on submissions from 16 banks, while the US dollar rate, on the other hand, is calculated using a panel of 18. Each bank is asked the same question: ‘At what rate could you borrow funds, were you to do so, by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11am?’ So basically, if you need to borrow cash from your fellow banker friends, how much would they charge you for it? ... When a bank lends money to a customer, it will assess the risk they pose and price the loan accordingly. The riskier you appear, the more you will have to pay. ... during the credit crisis Barclays had reduced its Libor submissions to protect the reputation of the bank from negative speculation which arose as a result of Barclays’ higher rate submissions in comparison with other banks – i.e. the bank wanted to make itself look stronger. |
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