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The Most Important Number in Finance Is Going Away. Wall St. Isn’t Prepared.

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The Most Important Number in Finance Is Going Away. Wall St. Isn’t Prepared.

The New York Times,

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Libor, the universal yardstick of loan pricing, could soon vanish, with huge implications. 

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8

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Recommendation

If you’ve ever had a student loan, car loan or mortgage, chances are the interest rate you paid had the London Interbank Offered Rate (Libor) as its basis. But Libor is more a guesstimate than anything else, and traders have found ways to manipulate the number to their advantage. According to financial journalist Matt Phillips, banks and other financial institutions have been slow to replace Libor with something else, despite regulators’ calls to do so by 2021. Ultimately, the change will prove costly. getAbstract recommends this illuminating article to borrowers and lenders. 

Summary

The London Interbank Offered Rate (Libor) is the world’s prevailing source for pricing trillions of dollars of debt, deposit accounts, derivative contracts and retail products like adjustable rate mortgages and student loans. At its most basic level, Libor encapsulates the daily polling results of what a few large banks believe is the interest rate they would need to pay to borrow from other banks. The calculation eliminates the highest and lowest estimates and then averages the remaining numbers to arrive at that day’s Libor. 

The Achilles heel of the system is the question used...

About the Author

Matt Phillips is a financial reporter for The New York Times.

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