LLike slide rule and martini lunches, the London Interbank offered a tariff (libor) was a good idea once. In 1969, the Central Bank of Iran was looking for an $80 million loan—at the time, a juicy ticket for a high-risk country that didn’t have the foreign exchange reserves to cover it. So Minos Zombanakis, their banker, assembled a consortium of banks, each of which would lend part of the money. But what interest rate is to be calculated? Inflation rose and interest rates were volatile; No bank wanted to lend at a fixed rate because it didn’t keep them in their pockets.
Zombanakis’ solution was libor. Each interest period, each bank would report its cost of borrowing. The average of these values plus a markup gives the interest rate on the loan. If lenders’ costs increased from period to period, their revenues would also increase. The idea came up – and with it the market for syndicated loans. By 1982, this market was valued at, and mostly tied to, $46 billion libor. Derivatives, mortgage lending and credit cards followed. In 2012 libor Set rates on approximately $550 trillion worth of contracts, more than seven times the world’s GDP. And yet since libor is declining. Next month, the final fixes on dollar lending will be finally lifted.
The trigger for the downfall was a scandal: In 2012 it came out that banks, brokers and traders had manipulated the benchmark for years in order to make profits. This led to record-breaking fines, arrests and a loss of confidence in the world’s most important figure. But there is a deeper reason for this liborThe demise of is due to the fact that today’s financial system makes the benchmark look as outdated as the cigar smoke and mahogany panels that helped birth it. During the 2007-2009 global financial crisis, the interbank lending market was affected libor should measure everything but evaporation. As the banks looked for more reliable sources of funding, it never returned to the same extent as before. And so, in 2017, regulators finally called the time and warned companies to prepare libors stop.
Replace the benchmarks libor are better suited to the financial world of the 21st century. With one each liborThe five currencies are something like alphabet soup. There is the secured daily funding rate (immediately) for the dollar, the Sterling Overnight Index moving average (sonia) for the pound, the average overnight rate of Tokyo (tone) for the yen, the Swiss overnight average exchange rate (saron) for the Swiss franc and the euro short-term exchange rate (€str) for the euro.
What they all have in common is that they measure the cost of borrowing based on a large number of actual transactions, rather than relying on troubled bankers to honestly respond to a subjective survey. Two of you-immediately And saron—Report interest rates on the repo market (for secured loans backed by government bonds) rather than bank deposits. This reflects the change in the financial system from bank lending to disintermediated, market-based financing.
Theoretically so liborThe alternatives of make more sense. In practice, their introduction was a long and rather laborious process. Dixit Joshi, a former Deutsche Bank Treasurer, unfavorably compared the complexity of the issue to that of Britain’s exit from the European Union. Hundreds of trillions of dollars in contracts, as well as the computing infrastructure used to trade and monitor those contracts, had to be renegotiated in a situation many never foresaw. for dollarliborThis meant that the original deadline of late 2021 (when fixings for other currencies were discontinued) was extended to next June.
Even now, around $74 trillion worth of contracts are using US dollars.libor and expire after the deadline. There will be no more extensions. The US Congress has passed a bill that would allow the Federal Reserve to intervene in and change treaties libor To immediately when they lack alternatives. (The parties can prevent this if they agree.) Zombanakis himself, now dead, probably would not have objected. “We assumed gentlemen wouldn’t try to manipulate things like that,” he told Bloomberg journalists in 2016, referring to the libor Scandal. “But as the market got bigger, you couldn’t trust it anymore… There’s just too much money involved.” ■
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