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London Interbank Offered Rate (LIBOR) | English Lesson

Jul 17, 2021

This is podcast number one, and today our topic is the London Interbank Offered Rate, or as you might know it, Libor.

VOCABULARY

Let’s begin with our key vocabulary. Listen now to these seven words and their definitions. You will hear them used later.  The first word:

  • Benchmark: a point of reference against which things may be compared or assessed.
  • Syndicated loan: a loan offered by a group of lenders.
  • Gauge: to estimate, to measure or to determine a size or an amount.
  • Conflict of interest: when someone gets personal benefit from their official actions or decisions.
  • Fine: penalty of money that a court of law or other authority decides has to be paid as punishment.
  • Underpin: to support, to be the basis for something.

TOPIC OF DISCUSSION

Okay! So, what is the London Interbank Offered Rate? Libor–– as it is known––is the interest rate major global banks use to lend to one another  in the international interbank market for short-term loans. Libor changes from day-to-day to reflect the reality of the marketplace. It can rise, it can fall, or it can stay the same. Financial agents use Libor as a benchmark when they set their own interest rates for different products. They use Libor as a floating base. It is an internationally recognized reference point. It is a benchmark.

How is Libor used as a benchmark?  Well, in a lot of ways. For example, the Libor benchmark is used in standard interbank products like forward rate agreements, interest rate swaps, interest rate futures and options.

The Libor benchmark is also applied to commercial products like floating rate certificate of deposits and notes, variable rate mortgages, and syndicated loans.

You will also see Libor used as a reference rate to set interest for consumer loan-related products like individual mortgages,  and student loans.

So, yes, Libor is a big deal. Now, the problem is that back in 2012, Libor lost its’ reputation as an honest and  trustworthy benchmark . Why? Well, this happened when regulators discovered that the banks that had been contributing information to set the rates had been manipulating the information they released. These banks did this to profit from their own trades, and of course this was a big conflict of interest, and not only that, it was illegal. Since that time, global banks have paid more than USD$9 billion in fines for their role in the scandal, and Libor has been moving out the door ever since.

Central banks are applying more and more pressure to push financial agents in their countries to move away from Libor to another rate. Choosing a new reference rates isn’t a problem – there are already many to choose from. The big problem is the enormous influence Libor already has in the market.

Because it was used for so many years by so many financial agents, Libor still underpins more than USD$ 300 trillion worth of contracts. This means that a move to another benchmark rate includes a tremendous amount of work. These contracts can be very complicated and all of the parties need to agree on changes to the underlying rate. Banks and investment firms still have a big job ahead, and time is running out.

 

FINAL REVIEW OF VOCABULARY AND OTHER

Alright. Here is the key vocabulary one last time. Remember, you can find these show notes and information about our English courses for economists on our webpage www.englishforeconomists.com.

  • Benchmark: a point of reference against which things may be compared or assessed.
  • Syndicated loan: a loan offered by a group of lenders.
  • To gauge: to estimate, measure or determine a size or amount.
  • Conflict of interest: When someone gets personal benefit from their official actions or decisions
  • To switch: to move from one position to another.
  • To underpin: to support, to be the basis for something.

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