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LIBOR rigging: Difference between revisions
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This was all well and good — you ''could'' see it that way, and with derivatives, you could certainly manage your risk that way — but bankers were still left with the rather unitary problem that their interest rate risk was buried intractably in a term loan. | This was all well and good — you ''could'' see it that way, and with derivatives, you could certainly manage your risk that way — but bankers were still left with the rather unitary problem that their interest rate risk was buried intractably in a term loan. | ||
What if, wondered the bankers, we separated them? We could offer our customers floating rate loans and sell them interest rate swaps, under an ISDA, by which they can convert those floating rates | What if, wondered the bankers, we separated them? We could offer our customers floating rate loans and sell them interest rate swaps, under an ISDA, by which they can convert those floating rates into fixed. | ||
You might be wondering what the appeal of that would be, over a plain old fixed rate loan, for the customer. JC wonders that, too. | |||
The appeal to the banks was obvious. Floating rate loans are easier to fund. But they expose customers to interest rate risk, which neither they, nor their bankers, want: if interest rates go so high as to ruin the customer, the bank is likely to lose money too. | |||
Interest rate swaps are easier to manage. They are managed by different people in the bank. | |||
At about the same time, Britain’s commercial bankers were having fun at the hands of the caravan parks, flying clubs and property investment consortia of middle England. The [[interest rate swap mis-selling scandal]] is a many-headed hydra — it turns out most commercial banks in the UK had hit upon variations on the same idea independently of each other and then jammed it down middle England’s gizzard, but the gist was this: rather than just offering them straightforward loans, banks would offer floating rate loans stapled — loosely — to complicated hedging products. | At about the same time, Britain’s commercial bankers were having fun at the hands of the caravan parks, flying clubs and property investment consortia of middle England. The [[interest rate swap mis-selling scandal]] is a many-headed hydra — it turns out most commercial banks in the UK had hit upon variations on the same idea independently of each other and then jammed it down middle England’s gizzard, but the gist was this: rather than just offering them straightforward loans, banks would offer floating rate loans stapled — loosely — to complicated hedging products. | ||