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1 – 10 of 665Patricia A. McGraw, Kamphol Panyagometh and Gordon S. Roberts
We extend Diamond's (1989, 1991) life-cycle hypothesis to posit that, once they reach the stage of bank borrowing, firms begin with prime loans and evolve toward borrowing more…
Abstract
We extend Diamond's (1989, 1991) life-cycle hypothesis to posit that, once they reach the stage of bank borrowing, firms begin with prime loans and evolve toward borrowing more cheaply at LIBOR as they grow larger, less risky and less characterized by asymmetric information. We conduct multinomial logit regressions to explain firms’ membership in one of three groups: prime only, prime and LIBOR, and LIBOR. We also examine spreads over prime and LIBOR and find that loans set up to allow borrowing at prime carry higher spreads than those allowing borrowing at LIBOR. Both sets of tests support the life-cycle hypothesis.
The London Interbank Offered Rate (LIBOR) is considered to be the most important interest rate in finance upon which trillions in financial contracts are decided. In 2008, it was…
Abstract
The London Interbank Offered Rate (LIBOR) is considered to be the most important interest rate in finance upon which trillions in financial contracts are decided. In 2008, it was revealed that the LIBOR traders were rigging the interest rates. Yet, there is an unresolved question that regulators and banking officials did not address in their quest to seek answers to the fraud: Were the banks under financial strain when they underreported their LIBOR rates? To answer this question, the article posits that the pressure to meet market expectations led the banks to experience financial strain. Data were gathered from 2004 to 2008 on the banks that were involved in the fraud (fraud banks) and matched with a control group of non-fraud banks. The results from a logistic regression model found sufficient statistical evidence to support the claim that fraud will be greater in banks characterized by a higher level of organizational complexity. Variables such as percent of outside directors, board members on the audit committee, and number of employees were all found to be statistically significant. These variables may offer key insights into detecting and preventing frauds in banks.
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Martin Hinch, Jim Berry, William McGreal and Terry Grissom
The purpose of this paper is to analyse how London Interbank Offered Rate Index (LIBOR) and the spread between LIBOR and the base rate of interest as set by the Bank of England…
Abstract
Purpose
The purpose of this paper is to analyse how London Interbank Offered Rate Index (LIBOR) and the spread between LIBOR and the base rate of interest as set by the Bank of England (BoE) influences the variation in house prices in the UK.
Design/methodology/approach
This paper uses monthly data over a long time series, since 1986, to investigate the relationships between house price and LIBOR. Data are drawn from several different sources to include housing, financial and macro-economic variables. The time series is sub-divided into a series of splines based on stages in the economic and property market cycle. Both value-based and percentage change models are developed.
Findings
The results show that BoE base/LIBOR margin variable has a strong positive and significant effect on house price; however, the percentage change model infers a weaker and inverse relationship. The spline analysis re-emphasised the significance of the BoE base/LIBOR margin variable. Where variation between base rates and LIBOR is reduced, a significant positive effect can be observed in the average house price; however, where significant variation exists, the BoE base/LIBOR margin has little effect and LIBOR itself becomes a significant driver.
Research limitations/implications
The results highlight that the predictive qualities of the BoE base/LIBOR margin, as the contribution of this margin to the explanation of house price, exceeds both the base rate and LIBOR variables individually. Also highlighted is the contribution of unemployment to the explanation of house price. In both the value and percentage change models, unemployment is shown as a negative and highly significant contributor.
Originality/value
Previous papers have demonstrated the important linkage between house price and interest rates, the originality in this paper lies in examining the impact of LIBOR and the spreads between LIBOR and base rate as key variables influencing variation in UK house prices.
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The “London InterBank Offered Rate” (LIBOR) is one of the most important short-term interest rates with trillions of US dollar in financial products tied to it. Due to recent…
Abstract
Purpose
The “London InterBank Offered Rate” (LIBOR) is one of the most important short-term interest rates with trillions of US dollar in financial products tied to it. Due to recent allegations of manipulation of the LIBOR, this paper aims to investigate the integrity of this rate.
Design/methodology/approach
The paper analyzes the LIBOR and its rate fixing process using different screens to detect potential manipulative behavior on the macro and micro level. As main frameworks, an interest rate parity approach and the construction of a theoretical LIBOR using Credit Default Swap (CDSs) are applied. A simulation on the potential impact from one through four banks manipulating the LIBOR is performed as well.
Findings
The results on the macro level show that the LIBOR deviates heavily from other short-term interest rates from mid-2007 onwards, reaching its peak in September 2008 with the collapse of Lehman Brothers. On the micro level, the individual submissions of the panel banks are investigated, finding inconsistencies for Barclays and HSBC. Furthermore, a simulation on the influence from potential manipulation under the current calculation method reveals substantial effects on the LIBOR fixing. Even one bank trying to manipulate the fixing has a strong influence on the rate setting.
Originality/value
This paper contributes to the academic landscape in that it investigates the LIBOR rate setting process and if irregular behavior can be detected, given the screens used. Due to the findings of conspicuous behavior in the fixing during certain periods, the integrity of the rate setting process is more than questionable.
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Matt Bickerton and Stephen Louis Gruneberg
The aim of this research is to answer whether or not wholesale interest rates, such as the London Interbank Offered Rate (LIBOR), can be used as an effective policy instrument to…
Abstract
Purpose
The aim of this research is to answer whether or not wholesale interest rates, such as the London Interbank Offered Rate (LIBOR), can be used as an effective policy instrument to influence construction output. Developers and contractors borrow to finance construction and are charged retail interest rates, determined by the lending bank. The study investigated the relationship between LIBOR and construction industry output.
Design/methodology/approach
The study identified two time series, LIBOR and annual construction output and a number of regressions were run using the first differences to observe whether a change in LIBOR alone had a significant influence on construction output lagged by one to four years.
Findings
No significant relationship was found between changes in LIBOR and the annual change in construction output, regardless of the number of years lagged.
Social implications
The policy implication of this research shows that control of demand for construction by government using wholesale interest rates is unlikely to succeed. Banks' lending to developers depends on other factors, such as retail interest rates, risk management and expectations.
Originality/value
The value of this research is that it supports the view that government policy needs to focus on stimulating construction demand, using real projects rather than monetary policies, such as interest rate manipulation.
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The purpose of this paper is to trace how and why the market-designed Libor benchmark turned bad, thereby necessitating a regulatory response.
Abstract
Purpose
The purpose of this paper is to trace how and why the market-designed Libor benchmark turned bad, thereby necessitating a regulatory response.
Design/methodology/approach
The study relies on primary and secondary data in the public domain and complemented by a single-case study.
Findings
The study demonstrates how and why Libor benchmark rigging led to reforms in the UK and elsewhere.
Research limitations/implications
The study relying mainly on the secondary data analysis needs to be enhanced by further empirical-based studies.
Practical implications
Insights generated by the study suggest why it might not be worthwhile for market participants to game the system.
Social implications
Libor benchmark affects the financial system widely with varying significance to the wider public. With better regulatory oversight, its negative impact is expected to be mitigated considerably.
Originality/value
The seriousness with which the enforcement agency and judiciary now treat financial crime weakens the earlier public perception that white-collar crime is enforced differently.
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Jawad Ali, Michael Rainey and Asal Saghari
To examine the implications of the cessation of LIBOR in the context of Islamic finance transactions and to suggest potential solutions for the Shari’ah-compliant use of near…
Abstract
Purpose
To examine the implications of the cessation of LIBOR in the context of Islamic finance transactions and to suggest potential solutions for the Shari’ah-compliant use of near risk-free reference rates (RFRs) in such transactions.
Design/methodology/approach
Provides an overview of the main regulatory changes by the UK’s Financial Conduct Authority (FCA) to LIBOR, a review of the key details regarding the cessation of LIBOR and specific risk factors, a discussion of core concepts of Islamic finance and the unique challenges that the models face considering the LIBOR reforms, and an outline of several innovative solutions that can be utilized by organizations and institutions to overcome the potential complexities of the LIBOR reforms.
Findings
The financing component of a seller’s profit margin in a murabaha transaction may be calculated using LIBOR, a forward-looking rate. LIBOR as a financing rate benchmark is being replaced by RFRs, which are backward-looking rates. A possible way to use RFRs in a murabaha transaction might be to recalculate the seller’s profit margin depending on actual RFRs during the financing period with the seller offering appropriate rebates to the buyer.
Originality/value
Expert guidance from experienced corporate, financing, investment, and Islamic financing lawyers.
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The transition away from LIBOR.
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DOI: 10.1108/OXAN-DB251887
ISSN: 2633-304X
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J. Paul Forrester and Mary Jo N. Miller
Summarize and review the key developments during the first three-quarters of 2021 relating to transition of the London InterBank Offered Rate (LIBOR) to alternative risk-free…
Abstract
Purpose
Summarize and review the key developments during the first three-quarters of 2021 relating to transition of the London InterBank Offered Rate (LIBOR) to alternative risk-free rates, in accordance with the guidance of global regulators and market participants.
Design/methodology/approach
Outlines and explains four key events to date during 2021 that are instrumental to the success of LIBOR transition, including the ISDA 2020 IBOR Protocol and Supplement, the 5 March 2021 announcements by ICE Benchmark Administration and the Financial Conduct Authority, the transition of interdealer swap conventions from LIBOR to SOFR, and the ARRC endorsement of the CME Group SOFR term rate.
Findings
The global adherence to the ISDA Protocol and Supplement, the successful launch of “SOFR First” and other “RFR First” swaps convention transitions, and the ARRC’s endorsement of CME’s SOFR term rate have given the market the clarity and tools that it needs to complete the transition away from LIBOR by the deadlines fixed by the 5 March 2021 benchmark transition event.
Practical implications
It now is clear that market participants globally have the resources to, and must, move to adopt alternative reference rates and related operational systems and other infrastructure to cease origination of new LIBOR-linked contracts after 31 December 2021. The ARRC’s endorsement of the SOFR term rate for business loans and related derivatives and securitizations is a critical positive development for the structured finance market.
Originality/value
Expert analysis and guidance from experienced finance lawyers.
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Essia Ries Ahmed, Md Aminul Islam, Tariq Tawfeeq Yousif Alabdullah and Azlan bin Amran
The purpose of this paper is to find applicable Islamic pricing benchmarks (IPBs) instead of the market interest rates which are currently used in Islamic finance as benchmark.
Abstract
Purpose
The purpose of this paper is to find applicable Islamic pricing benchmarks (IPBs) instead of the market interest rates which are currently used in Islamic finance as benchmark.
Design/methodology/approach
The suggested model (Islamic pricing benchmark model (IPBM)) obviously reveals the feasibility and practical effectiveness of a substitute to London Interbank Offered Rate (LIBOR) and as an evaluator tool to suggested investment projects. The model is a suggested mechanism which could be used as an alternative choice to the conventional borrowing based on the forbidden Riba or on interest. The suggested IPBM depends on estimating the rate of return for any project on consideration of the cash flows in future which is expected to be relative to the invested capital.
Findings
The IPBM approach might be applied to financial tools, where the fund owner bears the loss since it is not because of negligence. An instrument to help identify the investment for target rates of return (as an alternative choice to LIBOR) to identify a breakeven point based on expected cash flows for the project to be financed instead of based on seeking the indicators of interest or Riba (as LIBOR). This feature of the IPBM model as an Islamic benchmark renders it as a Shariah pricing mechanism for the Islamic financial products.
Practical implications
The IPBM could be used as a financial instrument to assist in identifying the investment for the target return rates to determine a breakeven point based on expected cash flows for the project to be funded instead of being based on seeking the interest indicators or Riba (as LIBOR). This feature as an Islamic benchmark is considered as a Shariah pricing mechanism for the Islamic financial products. In particular, the proposed model incorporates the Shariah parameters. In that, it is hoped that the Islamic financial instruments will be more comprehensive in their Shariah compliance and thereby may bring more credibility to the Islamic financial system in general.
Originality/value
This paper highlights several important issues related to the IPBMs in Islamic financial institutions which are not widely discussed among researchers. This study contributes to finding an alternative IPB for the Islamic financial products which is currently using the conventional interest rate (LIBOR) as its benchmark. The current study provides empirical evidence for the possibility of relying on the IPBM as an Islamic benchmark to price Islamic financial transactions.
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