The British Bankers’ Association’s London Interbank Offered Rate, due to the amount of money directly dependent on it, represents the most important set of numbers in the world. According to Libor’s official sources, its activity can be resumed to " a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market." As an additional feature, Libor applies mainly to the Pound Sterling, but also to major currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar.
Libor anchors contracts have a value of $300 trillion, despite the lack of details known from the exterior.
Only two economists are responsible with the co-ordination of the funds, while working in an unremarkable open-plan office in London’s Docklands.All their work is based on a computer program, that discards the lowest quarter and highest quarter of the estimates, for each of ten currencies and 15 loan duration, calculating the remainder, in order to find the daily Libor’s result, determined every morning at 11:00 am London time.
The entire process is conceived as a precaution in case of unexpected interruptions that could appear in Libor’s schedule.A single error could determine the paralysis of large parts of the global financial system, as Libor is responsible the monthly payments on around half of the adjustable-rate mortgages in the US.
Libor represents a major factor in the huge market for interest-rate swaps, defined as contracts established between banks and organizations as a reference to a payable fixed rate of interest on a given amount of money to another bank, which pays a variable rate on the same amount. It is about the exchange sets of interest payments on a given amount of capital, providing a liquid secondary market for residential mortgages, which in turn allows lower interest rates on US mortgages.
The total amounts involved exceed $300 trillion as they enable lenders and borrowers to cancel out the effect of changing interest rates.
The most important financial derivatives related to LIBOR are Eurodollar features, defined as US dollars deposited at banks outside the United States, primarily in Europe and traded at the Chicago Mercantile Exchange (CME).
This economical process was invented at the start of the 1980’s and has had a remarkable evolution.During the financial crisis crystallized in the 1957, in the UK, Libor overcame its initial anxieties and circumvented the new controls by supporting the eurodollar market. As a result, the centre of the international money markets became entirely focused on London.
In 1960’s, theBank of England promoted a new challenge to the traditionally staid, by introducing the concept of discount houses’, that were offering to the lenders and borrowers an inventive way to get directly in touch with each other, charging a fee for doing so.
The new concept was based on the following:‘ a Libor input is what a bank could do, not what it has done’, as it was involving a fixed procedure and predetermined panels of banks.This was also one of the most long-standing Libor’s fortifications as it determined its presence on more than 300,000 computer terminals worldwi