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LIBOR will finally be stopped in June

L.ike slide rule Martini Lunch, London Interbank Offered Rate (Revol) was once a great idea. In 1969, the central bank of Iran was seeking an $80 million loan, a high ticket for a high-risk country with no foreign exchange reserves to cover it at the time. So their banker, Minos Zombanakis, formed a syndicate of banks, each lending a portion of the funds. But how much interest should you charge? Inflation rose and interest rates were volatile. No bank wanted to lend at a fixed rate in case they ran out of money.

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Mr. Zombanakis’ solution is Revol. For each interest period, each bank reports its borrowing cost. The average of these plus the profit spread is the interest rate on the loan. As the cost of the lender rises from period to period, so does the income. The idea took off and with it the syndicated loan market was born. By 1982, the value of this market had reached his $46 billion, most of which was pegged to: Revol. Derivatives, mortgages and credit cards followed. by 2012 Revol Set rates for contracts governing approximately $550 trillion, more than seven times global GDP.yet ever since Revol is on the decline. Next month, the last few measures on dollar lending will be permanently suspended.

The company’s downfall was sparked by a scandal. In 2012, it was revealed that banks, brokerages and traders had been manipulating profit metrics for years. This has resulted in record fines, arrests and a loss of confidence in the world’s most important figures. But the deeper reason is RevolThe demise of today’s financial system is making benchmarks look as antiquated as the cigar smoke and mahogany panels of their birth. During the global financial crisis of 2007-2009, the interbank lending market Revol It was intended to measure everything but evaporated. As banks turned to more reliable sources of funding, they never returned to the depths they had before. And in 2017, regulators finally told the time, warning companies to prepare for: Revoldiscontinued.

superseded benchmark Revol Better suited for 21st century finance.one for each Revol‘s five currencies are like alphabet soup. Guaranteed overnight loan rate (sofur) for the dollar, the pound overnight index average (Sonia) in the case of pound, Tokyo next day average rate (toner) for the yen, the Swiss average overnight rate (salon) short-term interest rates of the Swiss franc and the euro (€str) for euros.

What they all have in common is that they base borrowing costs on a large number of actual transactions rather than relying on rival bankers to honestly answer subjective surveys. Two of them—sofur and salon– Report interest rates for the repo market (government bond-backed loans), not for bank deposits. This reflects a shift in the financial system from bank lending to non-intermediate, market-based finance.

So theoretically, Revolalternative makes more sense. In practice, it was a long and rather tortuous task to introduce them. Dixit Joshi, former finance chief of German financial institution Deutsche Bank, compared the complexity to the complexity of Brexit against the European Union. The multi-hundred-trillion-dollar contracts and computing infrastructure used to trade and monitor them had to be renegotiated for situations many never imagined. For dollars-Revolwhich meant extending the original deadline date from the end of 2021 (when other currency corrections are finished) to June this year.

Today, about $74 trillion of contracts are still in dollars.Revol and expires after the expiration date. No further extensions. The US Congress has passed legislation allowing the Federal Reserve to intervene and switch contracts. Revol To sofur If there is no alternative. (This can be prevented if the other party to the contract agrees.) Zombanakis himself, now dead, is unlikely to object. “We took it for granted that the gentlemen wouldn’t try to manipulate things like that,” he told Bloomberg journalists in 2016. Revol scandal. “But as the market got bigger, I couldn’t trust it… there was too much money involved.”

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https://www.economist.com/finance-and-economics/2023/05/18/libor-will-at-last-be-switched-off-in-june LIBOR will finally be stopped in June

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