How Banks Respond to Issues in Libor: Money, Banking, and Central Banks

According to the video, LIBOR, which stands for London Interbank Offered Rate, is an average of the interest rates that banks lend to each other. LIBOR is calculated by Thomson Reuters for the British Bank Association and it is there to provide a benchmark for other types of securities and financial transactions. This paper analyzes the video Libor: Money, Banking, and Central Banks, by explaining what banks do in the situation that they are low in cash, what interbank rates are, and how LIBOR compares to the Federal Funds Rate.

When one deposits their money into banks, the bank won’t keep all the money that has been received The way a bank makes money is that it lends a portion of the money that it receives to other people and companies as loans, Whenever a bank might get low on cash or whenever it might get close to its reserve requirements, it might be attempted to borrow money from a bank, and usually other banks are willing to lend this money, because they want to make interest off of it.

It’s not unusual at all for banks to loan each other, and the rate that banks lend at each other is called the interbank rate, What the British Bank Association does is survey a variety of banks numbering from six to perhaps twelve within London, to see at what interbank rate they have been lending to others r have been accepting a loan from others, to arrive at the average, and they ultimately coin this with term overnight LIBOR.

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The most fascinating thing about LIBOR is that it is done in ten currencies. In comparison the Federal Funds Rate, which revolves more around policy concerns, LIBOR distinguishes itself from other bank rates by taking place in ten different currencies, This allows for one to obtain a more accurate average interbank rate, which gives more insight as to what shape the economy currently is in.