To understand how the international financial system is necessary to know each of the component parts and operating mechanisms. The key pieces of the global financial system are, of course , banks . And they have certain ways of regulating their mutual relations . The LIBOR rate is one of them .
What is LIBOR ?
LIBOR The word consists of the initials in English the following words : London InterBank Offered Rate . This I can translated as interest rate London interbank market in which resides also the definition of LIBOR.
Definition of the LIBOR
A broader definition of LIBOR should clarify that this is a daily rate that banks worldwide are referenced for interbank loans. The LIBOR rate thus acts as a guide to rate each bank allocates to funds offering similar institutions .
Who sets the Libor ?
The LIBOR rate is set daily , around 11:00 am (London time ) , by the British Bankers Association . This partnership involves , however , banking institutions operating in sixty countries around the globe , for which LIBOR is of international importance.
How to calculate LIBOR
The libor rate is , in general, an average of the interest rates that apply to interbank lending sixteen largest banks system participants who are also operating with higher values .
Other uses of the Libor
LIBOR is used as a reference for other banking operations . For example , the six-month LIBOR rate is taken as reference for mortgages in America , while in England the three-month LIBOR rate also works for the granting of certain mortgage loans.
The LIBOR rate also serves as a reference for the price of various currencies around the globe, such as the dollar, the pound and the yen .
Why LIBOR established
The LIBOR interest rate was set as a reference tool in the 1980s , when interbank began to grow exponentially.
To standardize the loans and transfers of funds between banks , in 1984 the British Bankers Association began to take the first steps for the establishment of LIBOR , which became operational in January 1986 effectively .