ICE LIBOR. These eight letters may seem innocuous enough, but they have a profound impact on each and every loan you’re involved with, and you’ll find them quoted in many loan documents. So, what exactly do they mean?
LIBOR or ICE LIBOR (previously widely known as BBA LIBOR) stands for the London InterBank Offered Rate, set by the Intercontinental Exchange (hence the ‘ICE’ prefix). Essentially, LIBOR is the rate at which banks, which are the centre of the financial world, are able to borrow from each other in the London ‘interbank’ market. This market allows banks with liquidity needs to borrow quickly from other banks with surpluses, thus enabling them to avoid holding nearly all of their asset base as liquid assets. LIBOR rates are published daily, at 11.30AM London time.
Because banks are so important in the world of finance, their interest rate for borrowing has widespread implications. Indeed, LIBOR is the world’s most widely-used benchmark for short-term interest rates – in other words, financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. LIBOR rates are often very low compared to the rates offered to the average borrower. Why? Usually, another bank is very likely to be able to repay its debts due to the high cashflow it oversees. They are the financial world’s most preferred borrowers, so they are awarded the lowest interest rates.
That rate then trickles down to less creditworthy borrowers, snowballing in size as it does so. For example, a large international corporation with an excellent credit rating – still one of the most preferred borrowers – may be able to borrow money for one year at LIBOR plus four or five points, say. Your personal credit rating might permit you to borrow at LIBOR plus many more points, dependent on your past ability to repay your debts. The point is that virtually all short-term debts are to some degree dependent on ICE LIBOR. As a result, it is estimated that at least £206 trillion worth of derivatives are tied to the LIBOR.
The singular nature of the acronym can sometimes be misleading: there are actually several LIBORs around the world. Each morning, the ICE issues benchmark rates for loans in five currencies (the dollar, sterling, euro, yen, and Swiss Franc) and in several maturities, ranging from overnight to 12 months. However, the LIBOR most often quoted by financial publications and the general investor is the 3-month rate, and that’s usually what is meant by most people’s reference to the figure.
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