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LIBOR rigging: Difference between revisions
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{{drop|T|he basic model}} of a bank is to borrow, short-term, at a low rate, and lend, long-term, at a high rate. Generally, banks calculate interest on deposits, by which they borrow, at a [[Floating rate|floating]] rate and on term loans, by which they lend, at [[Fixed rate|fixed]] rates. | {{drop|T|he basic model}} of a bank is to borrow, short-term, at a low rate, and lend, long-term, at a high rate. Generally, banks calculate interest on deposits, by which they borrow, at a [[Floating rate|floating]] rate and on term loans, by which they lend, at [[Fixed rate|fixed]] rates. | ||
There is a straightforward reason for this: [[Deposit|call deposit]]s don’t have a term | There is a straightforward reason for this: [[Deposit|call deposit]]s don’t have a term; they can be withdrawn at any time. All you can do is apply a prevailing daily rate.<ref>You could look at deposits as “rolling overnight term loans”. Their fixed interest therefore resets each day. Yes: there are such things as term deposits, but roughly 70% of deposits are overnight. (see ''{{Plainlink|https://www.bankofengland.co.uk/statistics/tables|Bank of England statistics}}'').</ref> On the other hand most people borrow for a fixed term and want certainty on how much interest they must pay, so prefer fixed interest. | ||
Since banks ''borrow'' in floating and ''lend'' in fixed, they have “''structural'' interest rate risk”. It is a natural function of how banks work. They want floating rates to be low, and to move lower. If they don’t manage this risk, things can get funky, fast. Just ask [[Silicon Valley Bank]]. | Since banks ''borrow'' in floating and ''lend'' in fixed, they have “''structural'' interest rate risk”. It is a natural function of how banks work. They want floating rates to be low, and to move lower. If they don’t manage this risk, things can get funky, fast. Just ask [[Silicon Valley Bank]]. | ||