LIBOR (London Interbank Offered Rate) is the benchmark interest rate at which major global banks lend to one another. It is calculated daily by taking the average rate that a panel of major banks say they would be charged if borrowing from other banks. LIBOR is used as a reference rate for trillions of dollars of financial products including mortgages, credit cards, and student loans. In 2012, it was discovered that banks had been manipulating LIBOR submissions, resulting in a major global scandal. The LIBOR benchmark is being phased out and replaced by 2021 with alternative risk-free rates such as SOFR in the US.

1. LIBOR
LONDON
INTERBANK
OFFERED RATE

2. Definition of libor :-
The London Interbank Offered Rate, or LIBOR,
is the most common benchmark interest rate index
used to make adjustments to variable-rate loans
and credit cards. LIBOR is used by world banks when
charging each other for short-term .

3. • LIBOR Rate (London Interbank Offer) is an estimated rate
which is calculated by averaging out the current rate of
interest being charged by major prominent banks in London
which serves as a benchmark rate for the financial markets
domestically as well as internationally, where it can change
on day to day basis given the changes in certain market
conditions.
 What Is Libor ?

4.  Who Invented Libor ?
• Minos Zombanakis
• LIBOR's origination has been credited to a Greek banker by the
name of Minos Zombanakis, who in 1969 arranged an $80
million syndicated loan from Manufacturer's Hanover to the Shah
of Iran based on the reported funding costs of a set of reference
banks (Ridley and Jones 2012).

5. Libor Currencies :-
• Originally (in 1986) Libor was published for 3 currencies:
1. US dollar
2. pound sterling .
3. Japanese yen.
The number of LIBOR currencies grew to a maximum of 16. A number of these
currencies merged into the euro in 2000. Now, there are 150 Libor rates, spanning
ten currencies. The 5 major currencies are given below

6. • British pound sterling - GBP LIBOR
• European euro - EUR LIBOR
• Japanese yen - JPY LIBOR
• American dollar - USD LIBOR
• Swiss franc - CHF LIBOR

7. Libor Process :-
• To produce 35 rates on every business day, the ICE Benchmark
committee maintains an administration panel of between 11 to
16 bank contributors.
Step 1 :-
The process of setting interest rates begins by asking the panel
the rate which they are willing to lend to other financial
institutions. Usually, this occurs earlier in the day, well before the
official hours of publishing the benchmarked rate.

8. Step 2 :- After they provide their desired rates, the
contributions are listed in top-down order.
Step 3 :- Outlying quotes are eliminated by removing 25%
of the higher and lower quoted rates. Once outliers are
eliminated, the remaining rates are averaged and rounded to
five decimal places. The process is repeated across the five
currencies for each maturity to produce a total of 35
LIBORs.

10. EXAMPLE
Say, a group of 14 member banks propose the following as one year LIBOR
rates :-

11. • Normal mean=
(3.9+3.5+3.1+3.4+2.6+2.7+2.8+3.2+3.6+3.7+3.8+2.9+2.
5+2.8)/14= 3.17 %
• Calculating 10% trimmed mean
Step1: Arrange all data in descending order3.9, 3.8, 3.7, 3.6, 3.5,
3.4, 3.2, 3.1, 2.9, 2.8, 2.8, 2.7, 2.6, 2.5
Step 2: Trimmed 5% of the data from the upper and lower end
10% of 14= 1.4 ≈ 1

12. • Step 3: New Data set
• 3.8, 3.7, 3.6, 3.5, 3.4, 3.2, 3.1, 2.9, 2.8, 2.8, 2.7, 2.6
• New mean =
(3.8+3.7+3.6+3.5+3.4+3.2+3.1+2.9+2.8+2.8+2.7+2.6)/12
= 3.175 %

13. How Many Libor Rates Are There ?
35 different Libor rates Libor is produced once each
day, although there are 35 different Libor rates posted-
which includes seven different maturities across five
currencies.

14. Need for libor :-
For determining interest rates for various debt instrument
For mortgages
For corporate loans
For government bonds
For Credit card
for Student loan in various countries

15. Uses of Libor :-
• Uses of LIBOR Lenders , including banks and other financial
institutions , use LIBOR as the benchmark reference for
determining interest rates for various debt instruments . It is also
used as a benchmark rate for mortgages , corporate loans ,
government bonds , credit cards , and student loans in various
countries .

16. Maturities of libor :-
LIBOR curve typically plots its yield
curve across seven different maturities -
overnight (spot next (S/N), one week, one
month, two months, three months, six months,
and 12 months .

18.  Barclays scams :-
 2005 :- Barclays tried to manipulate the Libor
 2007 :- Barclays manipulate rates to show good credit quality
of bank
2008 :- Barclays officers reported , bank not reporting correct
rates
 2009 :- BBA circulated guidelines submission of rates ,
which Barclays does not follow

19.  2011 :- RBS sacked 11 employees for attempt of
manipulating the LIBOR
 2012 :- Barclays agreed and penalty has been charged .
While in 2010 they committed they are following new
fundamental rules

20. LIBOR SCAM :-
• The scandal arose when it was discovered that banks were
falsely inflating and deflating their rates .
• Libor is used in the U.S derivative market , an attempt to
manipulate U.S derivatives markets and thus a violation of
American law .
.

21. • Since students loans , financial derivatives and other
financial products often rely on libor as a referenced rate ,
the manipulation of submissions used to calculate those
rates can have significant negative impact on consumers
and financial markets worldwide .
• In June 2012 , multiple criminal settlements by the Barclays bank
revealed significant fraud and collusion by member banks
connected to the rate submissions , leading to the scandal .

22. Effect Of Libor :-
• LIBOR is also the basis for consumer loans in
countries around the world, so it impacts consumers
just as much as it does financial institutions. The
interest rates on various credit products such as credit
cards, car loans, and adjustable-rate mortgages fluctuate
based on the interbank rate.

23. • The impact of LIBOR transition on the financial
services industry will be high given that it is used to
price and hedge cash and derivative instruments. Banks
will need to gear up for LIBOR transition by efficiently
handling the risks involved in identifying and
transitioning to a new benchmark rate.

24.  Panel Bank :-
In the financial world, a panel bank commonly
refers to one of several banks that contribute to the
EURIBOR or a similar collective interest rate setting
process. The establishment of interest rates based on
what banks lend to one another helps to define some
popular and active daily markets.

25. • The “panel bank” LIBOR calculation methodology
is designed to produce an average rate that is
representative of the rates at which large, leading,
internationally active banks with access to the
wholesale, unsecured funding market could fund
themselves in that market in USD for the relevant
tenors.

26.  Saving impact of libor :-
• The impact of LIBOR transition on the financial services
industry will be high given that it is used to price and
hedge cash and derivative instruments. Banks will need to
gear up for LIBOR transition by efficiently handling the
risks involved in identifying and transitioning to a new
benchmark rate.

27.  Reference Rate of libor :-
• A reference rate is a rate that determines pay-offs in
a financial contract and that is outside the control of the
parties to the contract. It is often some form
of LIBOR rate, but it can take many forms, such as
a consumer price index, a house price index or
an unemployment rate. Parties to the contract choose a
reference rate that neither party has power to manipulate.

28. Is SOFR replacing LIBOR ?
• On 31th December 2021 ,
• The Secured Overnight Financing Rate ( SOFR ) Key Takeaways .
The Secured Overnight Financing Rate ( SOFR ) is a benchmark
interest rate for dollar denominated derivatives and loans that is
replacing the London Interbank Offered Rate ( LIBOR ) .

29.  Conclusion :-
LIBOR replacement with alternative risk-free rates
is a critical transformational assignment in the global
financial market landscape. Banks and Financial
institutions should act now for a successful transition of
new risk-free rates.