The London Interbank Offered Rate is the interest rate which banks can borrow money from other banks. It is a wholesale interest rate that determines the rate at which banks can borrow money from banks that are part of the London Interbank Market.
Australia (PRWEB) July 18, 2012
The LIBOR scandal is all over the news. And whether one is a serious investor, a super fund member or just paying a mortgage, the London Interbank Offered Rate, or LIBOR, should matter to everyone. However, what is LIBOR? How does it affect the finance industry and what steps can be done to protect one’s self?
What is LIBOR?
The London Interbank Offered Rate is the interest rate which banks can borrow money from other banks. It is a wholesale interest rate that determines the rate at which banks can borrow money from banks that are part of the London Interbank Market. In effect, it sets a minimum cost for borrowing from which other loan interest rates are calculated. The British Banker’s Association sets the LIBOR daily based on the data member banks provide.
However, the rate is not only of interest to bankers in London, or of the United Kingdom. LIBOR is the most widely used benchmark for the rate of short-term loans in the world. Banks in Canada, Switzerland, the United States and, of course, the United Kingdom also use it. Its usefulness is not restricted to banks either. The rates of business loans, residential loans and personal loans also depend on the LIBOR rate. For instance, a corporation with an excellent credit rating may qualify for a loan with a LIBOR interest rate plus four or five points. The interest rates of smaller loans, such as mortgages, are also based on the LIBOR, which means that one way or another we are all affected.
Recent reports show that several banks seem to have provided false data to the British Banker’s Association in an effort to make themselves look stronger to investors. This scandal, which has already caused the resignation of Barclays’ Chairman Marcus Agius, is at the very heart of the World’s financial system and shows how the cost and price of money itself may be manipulated by a few powerful banks. This does not do much to improve the already tarnished reputation of financial institutions.
According to ABC News finance reporter, Lexi Metherell, Australian lawyers are looking into the possibility of filing a suit against banks found guilty of manipulating the market. The group leader of the Slater & Gordon’s law firm estimates the total losses of the scandal in the billions of dollars.
How does this affect Australia’s LIBOR equivalent: the bank bill swap rate? The bank bill swap rate, or BBSW, is a benchmark of the rate Australian banks can borrow money from each other.
In a recent report by the Sydney Morning Herald, David Lynch, Executive Director of the Australian Financial Markets Association—the institution in charge of calculating the BBSW—said the BBSW is fundamentally sound as a benchmark because it reflects the actual lending interest rates traded in a homogenous market. However, six of the 14 banks that provide the data used to set the BBSW are currently under investigation by British authorities under accusations of manipulating LIBOR by providing false information.
The uncertainty this situation creates in the lending industry is of concern to investors looking to secure a loan. According to Chris Appleyard, financial analyst of Custom Wealth Solutions, investors looking to lend or borrow money should ensure they have an accurate understanding of the lending market before they make important financial decisions.
Custom Wealth Solutions is a privately owned and independently operated wealth and advisory firm in Australia. They are the leading name when it comes to providing holistic and comprehensive financial advice and strategies in wealth management, insurance, superannuation, SMSF's, lending and investments, to clients in Brisbane, Sydney, Melbourne and the Gold Coast.
For more information on Custom Wealth Solutions and their services, you may call them at 1300 001 297, or visit their website at http://www.customwealth.com.au/.