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Page 1: Graphical LIBOR
Page 2: Graphical LIBOR

Varun Khanna 2011085 Jugal Katariya 2011081 Vikas Harjai 2011054 Ankit Punjabi 2011119 Manan Singh 2011034 Ronnie Bhaumik 2011024 Kashish Popli 2011118 Rajnikant Patel 2011111

Presented by:

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The London Interbank Offered Rate (LIBOR) is a benchmark interest rate based on the rates at which banks lend unsecured funds to each other on the London interbank market

Each morning, global banks submit their borrowing costs to the Thomson Reuters data collecti on service

Calculated for fifteen different maturities and ten different currencies, the Libor is considered the most critical global benchmark for short-term interest rates

Introduction to Libor

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Many banks worldwide use Libor as a base rate for setting interest rates on consumer and corporate loans. When the Libor rises, rates and payments on loans often increase; they fall when the Libor goes down

Used as a base rate on financial markets for a number of derivatives instruments, including futures contracts, options, and swaps

Over $800 trillion in securities and loans are linked to the Libor

How does the Libor affect borrowing globally?

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Libor versus Prime Rate

•Setting Libor and Prime Rate: Libor is an average derived from the rates at which major banks lend to each other in London’s money markets. US Prime Rate is typically set at three percentage points above the federal funds rate. Libor vs US Prime Rate: setting Libor is more complicated than setting US Prime Rate

•Fixed Rate, Floating Rate: Libor is a floating rate – it fluctuates continually. US Prime Rate is a fixed rate – it typically remains unchanged for extended periods of time. Prime Rate versus Libor: Prime rate is fixed, Libor is floating.

•Primary Users of Libor and Prime Rate: Libor is used by banks – it is the interest rate at which banks lend to each other in certain London money markets. (Borrowers, lenders, and investors may use Libor as a reference rate.) US Prime Rate is used by consumers – it is the rate at which banks lend to their best customers. (Borrowers, lenders, and investors may use prime rate as a reference rate.) Prime versus Libor: Prime is used primarily by consumers; Libor is used primarily by banks (in theory). 

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Libor Benchmark – Benchmark Prime Lending Rate: Libor is a benchmark interest rate used as a reference in lending and borrowing transactions around the globe. US Prime Rate is a benchmark interest rate used as a reference in lending and borrowing transactions in the United States and elsewhere. Libor versus Prime Rate: both rates are benchmark interest rates with wide global usage. 

Publication of Libor and Prime Rate: Libor bank rates are published daily at 11:30am GMT by the British Bankers’ Association. The US Prime Interest Rate, also called the Wall Street Journal Prime Rate, is published in the Wall Street Journal. Prime Rate versus Libor: Prime interest rate is published by the WSJ; Libor is published by the BBA.Variations of Libor and Prime Rate: Libor is published for 10 currencies and 15 maturities, ranging from overnight to one year. Prime lending rates may vary slightly among individual commercial banks. Libor vs Prime Rate: there are many more official versions of Libor than there are official versions of US Prime Rate. 

Libor vs Euribor Libor and Euribor are conceptually the same. They are both averages of interest

rates charged by member banks for loans to each other over a number of different time periods. They are used as benchmarks for interest rates on other financial instruments, such as business loans and mortgages. They differ as to location and somewhat in the way they are computed.

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Libor is published daily by the British Bankers' Association (BBA).

Every morning global banks submit their borrowing costs to theThomson Reuters data collection service at 11 am London Time.

The calculation agent throws out the highest and lowest 25 percent of submissions and then averages the remaining rates to determinethe Libor.

Because LIBOR is an average of quotes and only calculated daily, the actual rates used between banks may fluctuate from the specific LIBOR rate.

HOW IS IT SET

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However, LIBOR provides a good approximation of the actual rates being used.

This approximation is normally more accurate for short-term LIBOR rates and less accurate for long-term LIBOR rates.

Calculated for 15 different maturities and 10 different currencies,the Libor is considered the most critical global benchmark for short-terminterest rates.

LIBOR rates are provided for periods of up to 12 months. The most common rates are the daily, weekly, one month, six month, and one year.

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LIBOR rates are also provided in ten currencies, including

American dollar - USD LIBORAustralian dollar- AUD LIBORBritish pound sterling - GBP LIBORCanadian dollar- CAD LIBORDanish krone - DKK LIBOREuropean euro - EUR LIBORJapanese yen - JPY LIBORNew Zealand dollar - NZD LIBORSwedish krona - SEK LIBORSwiss franc - CHF LIBOR

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When the LIBOR spread is high, it shows there is more concern in the banking sector that not all of the banks are on sound footing and there is a heightened default risk.

When the LIBOR spread is low, it shows there is less concern in the banking sector that not all of the banks are on sound footing and thereis a low default risk.

Calculating Interest:Libor is not a compounded rate but is calculated on the basis of actualdays in funding period/360*. Therefore, the formula is as follows:

*Please note that for GBP the calculation basis is 365 days.

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The US Dollar LIBOR (bbalibor) interest rate is the average interbank interest rate at which a large number of banks on the London money market are prepared to lend one another unsecured funds denominated in US Dollars.

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Why Libor Matters?•The Euribor and Libor rates at the centre of the price-

rigging scandal hitting Barclays bank are interbank rates

at the heart of short-term financing on a world scale.

•They act as a reference or benchmark for the pricing of

derivative products which are traded in massive amounts

•They also indirectly affect loans and mortgages for

households and businesses, and many other contracts

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•Libor is a flagship London instrument used throughout the world. Euribor

is the eurozone equivalent.

•Transactions made using Libor and Euribor rates most often last from a

few days up to a year, and the level is fixed once a day, around midday.

•The Euribor reference rate is set by 43 eurozone banks, while the Libor

rate is preferred by institutions from English-speaking countries.

•Separate reference rates for funds in pounds, dollars and euro are also set

by panels of six to 18 banks.

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Why libor is important?•It is often used as the base for variable-rate government and corporate loans and derivative-based products such as credit swaps•The rate at which the world's most preferred borrowers are able•to borrow money.•It is also the rate upon which rates for less preferred borrowers are based. For e.g, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points.•High LIBOR rates restrict people from getting loans, making a lower Fed discount rate a nonevent for the average person•Countries that rely on the LIBOR for a reference rate include the United States,Canada, Switzerland and the United Kingdom

.

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LIBOR is the average interest rate, the benchmark, for short term interest rates worldwide.

It is the rate at which a LIBOR bank could borrow funds at a specific moment in time. Affects $800 trillion worth of securities (investments). Various major and minor banks coordinated with one another to artificially create lower

interest rates to appear financially healthy. In LIBOR credit-swaps, interest rate hedges were sold to small and medium-sized

businesses, and since the interest rates were negotiated by bank representatives, interest owed to customers or interest owed to the bank by customers was manipulated.

Barclay’s and the various other banks who were part of LIBOR collaborated via email to manipulate the LIBOR interest rate, defrauding its customers in the process.

If bank representatives could nudge an interest rate up or down a few points they could bring in nice profits.

The $450 million fine paid by Barclay’s to US and UK regulators is just not enough considering the depth of the fraud.

LIBOR scandal could be the biggest fraud ever, touching businesses both big and small, as well as households.

Scam Done by Banks

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LIBOR is supposed to indicate the cost of unsecured lending between banks, but more and more, banks are requiring collateral before they will part with funds.

Because of that, the gap between highs and lows has increasingly grown, determining the rate and the others cut out of the process.

In 2011, highest and lowest submissions were separated by a mere 0.1% over the four months from June through September; this year, the gap has grown to an average of 0.32%.

High lending to the customer and the manipulating with the customer in respect of interest rate and inter corporate deposits with one another banks.

High borrowing led to subprime issue in the market and hence the banking sector was struggling to survive in the market.

For example, one have a house for 40,000$ but bank had allowed me to take a loan against my property for 1,00,000$.

This lead to liquidity crunch in the market and the market was collapsed. Hence lager amount of debt couldn’t stabilized the economy for a longer period.

How Bank Benefited

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• Experts call it the Biggest consumer fraud in the industry.

• This scandal forced both Barclays chief executive Bob Diamond and chairman

Marcus Agius to resignation.

• As early as 2005 there was evidence Barclays had tried to manipulate dollar

Libor and Euribor (the eurozone's equivalent of Libor) rates at the request of its

derivatives traders and other banks.

• Misconduct was widespread, involving staff in New York, London and Tokyo as

well as external traders.

• Between January 2005 and June 2009, Barclays derivatives traders made a total

of 257 requests to fix Libor and Euribor rates, according to a report by the FSA.

Barclays Libor Fixing Scandal

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At the onset of the financial crisis in September 2007 with the collapse of Northern Rock, liquidity concerns drew public scrutiny towards Libor. Barclays manipulated Libor submissions to give a healthier picture of the bank's credit quality and its ability to raise funds. A lower submission would deflect concerns it had problems borrowing cash from the markets.

Barclays' Libor submissions were at the higher end of the range of contributing banks, and prompted media speculation about the true picture of the bank's risk and credit profile.

Senior treasury managers instructed submitters to reduce Libor to avoid negative publicity.

On 6 December 2007, a Barclays compliance officer expressed concern about the Libor rates being submitted by other banks, but did not inform that its own submissions were incorrect, instead saying that they were "within a reasonable range".

To avoid the stigma associated with being an outlier with respect to its Libor submissions, Barclays started underreporting its rate.

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• After media reports questioned whether Barclays’ higher submissions for Dollar

Libor indicated that the bank had a liquidity problem – whether other banks were

wary of lending it money – the bank began sending in lowball numbers meant to ease

concerns about its cost of borrowing.

• The artificially low submissions were done at the direction of Barclays’ senior

management

• On 27 June, Barclays admitted to misconduct. The UK's FSA imposed a £59.5m

penalty. The US Department of Justice and the Commodity Futures Trading

Commission (CFTC) imposed fines worth £102m and £128m respectively, forcing

Barclays to pay a total of around £290m.

• As a result, the British Bankers' Association, the organisation that sets the Libor rate,

said it would accept losing the role.

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The scandal over the manipulation of Libor has the potential to become one of the most costly and consequential in the history of banking.

Central banks, in many cases, target Libor explicitly. That is to say, monetary policy decisions are often moulded around attempts to influence the rate.

From the point of view of central banks the course of action is simple: the lower the Libor rate, the less liquidity the market needs.

Thus the more Libor is under reported, the greater the misjudgment of liquidity needs by the central bank.

The greater the undersupply of liquidity, meanwhile, the higher real Libor rate soars, the greater the attempts to manipulate it downwards

Consequences and Its effect

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Banks have lost credibilility

Lost of faith in the system

Shift to alternative intrest rate indices

The gold and silver lease rate move upwards after the LIBOR scandal.

The higher the lease rate, the more valuable gold

and silver is to the central banks, and the higher the cost will be to short gold and silver.

Effects

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US prepare criminal case against banks that fixed interest rates in global scandal

British bank Barclays was fined $453 million after admitting to influencing the LIBOR (London Interbank Offered Rate)

Barclays, JPMorgan Chase, Bank of America, Citibank and Deutsche Bank were all involved and were recently sued by the city of Baltimore on LIBOR manipulation

Penalty by the Court

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