Page 33 - Bank Case Studies

How Libor Works

The London interbank offered rate (LIBOR) is based on
what banks say they pay to borrow from each other.

British Bankers

Association

The highest and lowest
The Libor is calculated
Banks on panel quartiles are discarded for 10 currencies and

and the remaining rates
Each day banks around the world are averaged 15 borrowing periods

submit a figure to the BBA based on the and affects:
rate at which they think they can

borrow funds from other banks.

s S Libor
S

Student
Derivatives Mortgages Loans
Loans

Derivatives loans Mortgages Student loans Corporate Bonds

Used to price Some lenders use Mortgages that are About half of Corporate bonds are
financial the Libor as a base adjustable-rate in variable-rate private used by businesses

instruments such as and add additional the U.S. about 45 U.S. student loans to raise finance and
swops transactions interest based on per cent of prime are tied to the Libor. are based usually on
and futures the borrower. mortgages and 80 a stated rate of

contracts. per cent of interest.
subprime have
interest rates based
on the Libor.

Diagram