Q.WHAT IS LIBOR AND WHAT IS IT USED FOR?
A.It is the London Interbank Offered Rate, a benchmark rate measuring what banks are charging one another for loans. It is a barometer of banks’ willingness to lend to one another and therefore indicative of perceived risk and of where banks expect lending prices (interest rates) to go. It is also used to price certain financial instruments.
Q.HOW IS IT CALCULATED AND HOW COULD IT BE “MANIPULATED”?
A.It is calculated by Thomson Reuters for the British Bankers’ Association (BBA) drawing on a panel of banks that agree to contribute. They are surveyed each day on the cost of borrowing at different maturities of debt and in 10 different currencies. After removing the top and bottom quartiles, the remaining numbers are used to calculate the rate for various lengths of debt in different currencies. The data for each contributing bank is published everyday. In order to “manipulate” it – to submit falsely low borrowing cost figures – a bank would probably need the cooperation of others.
Q.WHAT IS THE DIFFERENCE BETWEEN LIBOR AND AN AGREED CREDIT LINE BETWEEN BANKS?
A.Whereas a credit line is agreed between several parties, Libor is meant to be the current going rate in the market, without a specific credit contract.