Interbank Offered Rates: The Benchmark for Short-term Lending Among Banks

Interbank Offered Rates are the interest rates at which banks lend to each other, including SIBOR, LIBOR, and EURIBOR.

Historical Context

Interbank Offered Rates (IBORs) have long served as benchmarks in the global financial system. They represent the average rate at which a group of large, international banks lend to one another over short periods, typically ranging from overnight to one year. These rates were primarily designed to provide a measure of the cost of unsecured funding in various currencies.

LIBOR (London Interbank Offered Rate) has been the most widely used and was established in 1986. EURIBOR (Euro Interbank Offered Rate) and SIBOR (Singapore Interbank Offered Rate) followed suit, adapting similar methodologies but catering to different financial markets.

Types/Categories

• LIBOR (London Interbank Offered Rate):

  • Calculated based on submissions from a panel of international banks.
  • Provided in multiple currencies, including USD, GBP, EUR, JPY, and CHF.
  • Various maturities: overnight, one week, and one, two, three, six, and twelve months.

• EURIBOR (Euro Interbank Offered Rate):

  • Refers to the rates at which European banks lend to each other in euros.
  • Provided for various maturities, similar to LIBOR.
  • Administered by the European Money Markets Institute (EMMI).

• SIBOR (Singapore Interbank Offered Rate):

  • Used by banks in Singapore for interbank borrowing.
  • Calculated based on the average rates of lending from a panel of banks.
  • Commonly provided for maturities such as one, three, six, and twelve months.

Key Events

• 1986: Establishment of LIBOR by the British Bankers’ Association.
• 1999: Introduction of EURIBOR, coinciding with the inception of the Euro.
• 2012: LIBOR scandal surfaces, leading to fines and reforms.
• 2021: Transition from LIBOR to alternative risk-free rates due to manipulation concerns.

Detailed Explanations

Importance of IBORs

IBORs serve as reference rates for a wide array of financial products, including:

• Loans
• Mortgages
• Derivatives
• Bonds

Mathematical Formulas and Models

Basic Calculation Example (LIBOR):

Suppose bank submissions are as follows (in %):

• Bank A: 2.0
• Bank B: 2.1
• Bank C: 2.2
• Bank D: 2.3
• Bank E: 2.4

Assuming outliers (highest and lowest) are removed:

• Middle values: 2.1, 2.2, 2.3

LIBOR = (2.1 + 2.2 + 2.3) / 3 = 2.2%

Charts and Diagrams

Example: LIBOR Trends (Mermaid Chart)

    %%{init: {'theme': 'base', 'themeVariables': { 'primaryColor': '#f0f0f0', 'edgeLabelBackground':'#ffffff', 'tertiaryColor': '#fff' }}}%%
	gantt
	    title LIBOR Trends Over Time
	    dateFormat  YYYY-MM-DD
	    section LIBOR
	    USD LIBOR  :active, a1, 2010-01-01, 2020-01-01
	    GBP LIBOR  :active, a2, 2010-01-01, 2020-01-01
	    EUR LIBOR  :active, a3, 2010-01-01, 2020-01-01
	    JPY LIBOR  :active, a4, 2010-01-01, 2020-01-01
	    CHF LIBOR  :active, a5, 2010-01-01, 2020-01-01

Applicability and Examples

• Mortgage Interest Rates: Many adjustable-rate mortgages (ARMs) are tied to IBORs.
• Derivatives Contracts: Swaps, options, and futures often reference IBORs.
• Corporate Borrowing: Companies may secure financing based on IBOR-related products.

Considerations

• Regulatory Changes: Monitoring the transition from traditional IBORs to alternative rates like SONIA, SOFR, and €STR.
• Credit Risk: IBORs reflect banks’ credit risks, which might not be the case with risk-free alternatives.
• Market Volatility: IBORs can fluctuate due to economic conditions, affecting related financial products.

Related Terms

• SONIA (Sterling Overnight Index Average): Replaces GBP LIBOR.
• SOFR (Secured Overnight Financing Rate): US Federal Reserve’s alternative to USD LIBOR.
• €STR (Euro Short-Term Rate): The European Central Bank’s replacement for EURIBOR.

Comparisons

IBOR Type	Currency	Administration	Market
LIBOR	Multiple	ICE Benchmark Administration	Global
EURIBOR	EUR	European Money Markets Institute	European Union
SIBOR	SGD	ABS Benchmarks Administration	Singapore

Interesting Facts

• LIBOR Scandal: The manipulation scandal involved several prominent banks and led to heavy fines and a complete overhaul of the rate-setting process.
• Global Impact: LIBOR alone influenced financial products worth over $300 trillion at its peak.

Inspirational Stories

Banks and financial institutions have overcome significant regulatory challenges, adapting to reforms to ensure market integrity and transparency, demonstrating resilience and commitment to a fairer financial system.

Famous Quotes

“Money often costs too much.” — Ralph Waldo Emerson

Proverbs and Clichés

• “You have to spend money to make money.”
• “A penny saved is a penny earned.”

Expressions

• “Floating Rate”: A term often used to describe financial instruments that have variable interest rates linked to IBORs.
• “Basis Points”: Commonly used in the context of IBORs to denote changes or differences in interest rates.

Jargon and Slang

• “Libor Fixing”: The process of determining the daily LIBOR rate.
• [“Spread”](https://financedictionarypro.com/definitions/s/spread/ ““Spread””): The difference between the IBOR and the interest rate applied to a loan or deposit.

FAQs

Why are IBORs important?

They are critical benchmarks for financial contracts and instruments worldwide.

What will replace LIBOR?

Rates like SONIA, SOFR, and €STR are being developed to replace LIBOR.

How often are IBORs published?

Typically, IBORs are published daily on business days.

References

1. “The Transition from LIBOR,” Financial Conduct Authority, 2021.
2. “Understanding EURIBOR,” European Money Markets Institute, 2019.
3. “SIBOR Methodology,” ABS Benchmarks Administration, 2020.

Summary

Interbank Offered Rates such as LIBOR, EURIBOR, and SIBOR have been cornerstone benchmarks in global finance, influencing trillions of dollars in financial contracts. With ongoing transitions to more robust and transparent alternatives, the landscape of short-term lending is evolving, emphasizing the need for adaptability and vigilance in financial practices.