The Vegvisir

The purpose of this post is to briefly surmise LIBOR and its history, explain why a transition to SONIA is taking place and briefly introduce SONIA.  What is LIBOR? The London Interbank Offered Rate is a benchmark interest rate at which major global banks lend to each other in the international inter-bank market for short-term loans. It indicates the borrowing costs between banks and is calculated and published by the Intercontinental Exchange (AKA ICE)  It is based on the following currencies: USD, GBP, EUR, JPY and CHf It is available on different maturities: overnight / spot / next / one week / one month / two months / three months / six months / twelve months The combination of those five currencies and seven different maturities leads to a product of 35 different LIBOR rates being calculated and reported each business day. The typical quoted rate is the 3m U.S. dollar rate - commonly known as the current LIBOR rate How is LIBOR calculated?  LIBOR is calculated by the...

A summary of negative interest rates Typically employed as a last resort when faced with deflationary pressure or a very weak growth of the economy A monetary policy tool designed to penalize savings and holding of cash and incentive banks to loan out cash  Commercial or retail banks would be charged for holding their cash with the central bank  Some economists argue that negative interest rates are a unsustainable tool and can cause detriment to the economy if used over the long term Can sometimes be effective in preventing deflation within an economy and get back to more healthy economic environment such as the case with Sweden  Introducing negative interest rates With interest rates at an all time low this places a lot of pressure on retail and commercial banks to make money through the net interest margin - but with the global economy as it is with many economies reporting significant contractions in GDP terms could economies go further down the line to utilization of...

Repurchase agreement (AKA Repo) A repo is the equivalent of a short term collateralized loan. The owner of a marketable security would sell these securities for cash - and then agree to purchase back the security at a later date, usually at a higher price than he/she sold it for. The spread between the two prices is equivalent to interest. These are used by institutions who look for quick easy ways to make additional cash  with their current cash at little to no risk. So if  a bank had a surplus cash of £1 million, it would buy a repo, put in x buyback date and pay y for this lending as it is the buyer. The owner of the securitised assets would be selling or borrowing the cash in exchange. y is considered the equivalent of interest. To avoid the risk of the seller being unable to buy back those assets repo agreements are usually collateralised with securities with a market value in excess of the amount paid for them. As a consequence of this agreement the goals of bo...

Bank capital Bank capital is the difference between a banks assets and its liabilities. It represents the new worth of the bank or its equity values to investors. The asset portion of a banks capital includes its cash, government securities, and interest earning loans (mortgages, letters of credit and inter-bank loans). The liabilities section of a bank's capital includes loan-loss reserves and any debt it owes. A bank's capital can be thought of as the margin to which creditors are covered if the bank would liquidate its assets. Basel I, Basel II and Basel III standards provides a definition of the regulatory bank capital that market and banking regulators closely monitor. A banks capital can be divided or structured into different tiers - with Tier 1 capital the primary indicator of the banks financial health. How does it work?  Bank capital indicates the financial health of the bank. If an external force was take a hit on the bank (such as coronavirus of the f...