1 00:00:00,987 --> 00:00:05,968 You might have heard the term LIBOR when people are quoting interest rates. 2 00:00:05,968 --> 00:00:11,076 Or they're saying "Hey I'm gonna lend you money a few percentage points above LIBOR" 3 00:00:11,076 --> 00:00:14,267 You will hear...LIBOR quoted on some of the financial news channels. 4 00:00:14,267 --> 00:00:21,533 And what it is, is just an average of the interest rates that banks are lending to each other. 5 00:00:21,533 --> 00:00:27,533 And it is calculated by the British Bank Association. 6 00:00:27,533 --> 00:00:30,350 It's actually calcuated by Thomson Reuters for the British Bank Association. 7 00:00:30,350 --> 00:00:35,944 But it's there to kind of provide a benchmark for other types of securities and financial transactions. 8 00:00:35,944 --> 00:00:40,267 And it literally stands for the London Interbank Offered Rate. 9 00:00:40,267 --> 00:00:45,733 So...it's the..... in London...it's the rate..the offered rate between banks. 10 00:00:45,733 --> 00:00:48,667 The London Interbank Offered Rate. 11 00:00:48,667 --> 00:00:52,667 To understand that a little bit better we have set up two banks over here 12 00:00:52,667 --> 00:00:56,359 Bank A and Bank B. And you might have already known that 13 00:00:56,359 --> 00:00:59,095 when you go and deposit your money in banks, 14 00:00:59,095 --> 00:01:01,791 the bank won't leave all that money around. 15 00:01:01,791 --> 00:01:08,267 The way it makes money is lend a good bit of money to other people as loans. 16 00:01:08,267 --> 00:01:10,283 And it keeps just enough cash on hand 17 00:01:10,283 --> 00:01:14,467 That things well you know, people would actually come and ask for money from their checking account. 18 00:01:14,467 --> 00:01:15,933 We have enough on hand 19 00:01:15,933 --> 00:01:19,636 You could imagine....every now and then that bank might get low on cash. 20 00:01:19,636 --> 00:01:22,875 or it might get close to kind of a reserve requirement 21 00:01:22,875 --> 00:01:26,867 that the central bank in that country requires a bank to have on it. 22 00:01:26,867 --> 00:01:32,231 So in those situations ...say bank A is getting to that...that situation. 23 00:01:32,231 --> 00:01:34,200 They said "let me go borrow some money" 24 00:01:34,200 --> 00:01:37,067 Let me go borrow money from another bank. 25 00:01:37,067 --> 00:01:39,056 So this is interbank borrowing. 26 00:01:39,056 --> 00:01:41,000 Bank B over here they are flushed with cash 27 00:01:41,000 --> 00:01:43,067 So they say we don't like to keep so much cash around. 28 00:01:43,067 --> 00:01:46,754 We want to lend it. So we can actually get interest. We get no interest on cash 29 00:01:46,754 --> 00:01:49,933 So maybe bank B lends money to Bank A 30 00:01:49,933 --> 00:01:53,067 So maybe they lend this much cash 31 00:01:53,067 --> 00:01:55,548 So that's the new cash that bank A got. 32 00:01:55,548 --> 00:01:58,338 Right over there ...the new cash 33 00:01:58,338 --> 00:02:01,671 And of course it is a loan 34 00:02:01,671 --> 00:02:05,079 So this is a new loan. To offset it, remember 35 00:02:05,079 --> 00:02:07,570 assets are equal to liabilities plus equity. 36 00:02:07,570 --> 00:02:09,985 So liabilities is this whole thing over here. 37 00:02:09,985 --> 00:02:15,187 So this is loan from B for this cash. 38 00:02:15,187 --> 00:02:18,530 They have a little bit better of a cushion. 39 00:02:18,530 --> 00:02:23,035 And now B, their loan has increased and their cash has decreased. 40 00:02:23,035 --> 00:02:26,053 So this is a loan, loan to A. 41 00:02:26,153 --> 00:02:29,444 Right now, they took this cash and they gave to bank A 42 00:02:29,444 --> 00:02:32,694 And that rate that they lent it at, 43 00:02:32,694 --> 00:02:36,038 maybe it was that 1% annual rate. 44 00:02:36,038 --> 00:02:41,656 And of course it is to be renewed everyday, it is overnight rate. 45 00:02:41,656 --> 00:02:44,119 This rate is an interbank rate. 46 00:02:44,119 --> 00:02:48,856 So what they do is on behalf of the British Bank Association 47 00:02:48,856 --> 00:02:51,456 They go survey a bunch of banks in London 48 00:02:51,456 --> 00:02:54,333 eight, twelve, sixteen banks in London. 49 00:02:54,333 --> 00:02:57,122 So they said "Hey what was the rate in which you all transacted" 50 00:02:57,122 --> 00:03:00,373 and they will quote that 51 00:03:00,373 --> 00:03:03,205 They quote that as the overnight LIBOR 52 00:03:03,205 --> 00:03:08,830 So they quoted it, say hey 1.2% across all of the banks that we surveyed 53 00:03:08,830 --> 00:03:12,726 But what's interesting about the LIBOR, it is done in ten currencies 54 00:03:12,726 --> 00:03:14,723 It is not just in the sterling, the dollar 55 00:03:14,723 --> 00:03:18,733 or the yen...It is in ten currencies 56 00:03:18,733 --> 00:03:21,642 That's what really differentiate it amongst other things 57 00:03:21,642 --> 00:03:28,605 But really differentiate it from the effective Federal Funds Rate which is another interbank borrowing rate 58 00:03:28,605 --> 00:03:30,867 But that's in the United States 59 00:03:30,867 --> 00:03:34,390 And that's more revolving around policy concerns. 60 00:03:34,390 --> 99:59:59,999 The Federal Bank actually tries to change it.