Summer 2019

Northwest Farm Credit: Rural, Real Estate, Operating Loans; Farm Loans; Country Home Loans; Lot Loans; Equipment Financing; Young and Beginning Producers; Crop Insurance; Business Management Education; Property Appraisals

Issue link: http://digital.nexsitepublishing.com/i/1155824

Contents of this Issue


Page 3 of 23

What is LIBOR? LIBOR stands for London Interbank Offered Rate and is a benchmark rate that represents the interest rate that banks are willing to lend to each other for short-term unsecured loans. Terms on these short-term loans range from overnight to 12 months. LIBOR is set in five different currencies and has been in existence since the 1980s. It is used as the rate index in over $350 trillion of global financial products. How is LIBOR set? LIBOR rates are set daily based on interest rate submissions from 11 to 18 large international banks, including some U.S. banks. The submissions are intended to represent the rates at which the banks would borrow from each other, on that date, and for the specific time period. The high and low submissions are eliminated, and the remainder are averaged to determine the daily LIBOR rates. It has often been called the world's most important number. LIBOR is a benchmark interest rate, representing the amount that banks pay to borrow from each other. Globally, it underpins more than $350 trillion of loans and derivatives, from variable-rate mortgages to private student loans. But, LIBOR's days are numbered. The index is due to be phased out by the end of 2021. Finding an index that is secure and accurately reflects banks' borrowing costs is the primary objective. Replacing a number that has become so deeply embedded in the financial system comes with inherent challenges. Below are frequently asked questions about the LIBOR index. Northwest FCS continues to closely monitor all developments as central banks, regulators and industry wrestle with plans for the future. LIBOR Phasing out the most important number in finance libor 3 Northwest Farm Credit Services Why is LIBOR being phased out? There are two primary reasons: 1. Daily trading volume in LIBOR between banks has fallen from billions of dollars to less than $500 million primarily due to banking reforms and money market fund regulations, along with the LIBOR manipulation scandal. The lack of trading volume causes banks to submit interest rates they believe represent their cost but are not actually supported by real transactions. 2. In 2012, a widespread LIBOR manipulation scandal was exposed resulting in billions of dollars of fines to those involved. The manipulation was perpetrated by some of the banks submitting interest rates that had the effect of financially benefiting their businesses. While additional controls and safeguards have been put in place, the current LIBOR-setting process and lack of real transactions continues to allow the potential of manipulation. Northwest FCS continues to monitor developments related to the LIBOR phase-out. Please contact your relationship manager or local Northwest FCS branch team to learn more about the NW Variable rate index or discuss transition timing for your LIBOR indexed loans.

Articles in this issue

view archives of Yields - Summer 2019