Reference rate

Reference rate is banking on an interest rate, which is determined by a neutral body across institutions every day for a certain currency and interest rate duration and is recognized in the non-banking sector as a reference and benchmark.

General

Globally, banks differ in particular by the level of their interest, be it credit interest or interest on investments in a particular period. A uniform interest rate for a certain term and currency therefore do not exist. Therefore, there was the need to find a uniform interest rate, which could be eliminated this atomistic transparency and considered representative especially for large transactions ( such as the issuance of bonds or the granting of syndicated loans ) and other interest-bearing contracts. The reference rate therefore had to meet the requirements that are imposed on a recognized benchmark, as it is frequently used for contracts and legal reasons.

History

For a long time the unilaterally set by the national central banks interest rates were the only reference interest rate. Therefore, it was based in England at the "Minimum Lending Rate " ( called "base rate" ) of the Bank of England, "rate Prime" in the United States where the Federal Reserve Bank or in Germany at discount or later Lombard rate of the Deutsche Bundesbank. Financial transactions were linked to these base rates.

At the City of London but it was feared in banking circles an obstacle to the growth of banking transactions, so you dealt from October 1984 under the auspices of the British Bankers' Association (BBA ), which represents the interests of British banks, working groups with this topic. At the same time, the German banking industry agreed in August 1985 on creating the FIBOR as DM- reference interest rate.

Method

The BBA eventually developed a method which for the first time the LIBOR first introduced in January 1986, three currencies, namely British Pound, U.S. dollar and yen. The aim was to determine an arithmetic average rate in these currencies for specific maturities. To this end, the BBA least 8 and not more than 16 banks chose representative based in London ( " panel banks" ), the clock from 11:00 London time their internal bank interest rates (which must not be based on actual transactions ) daily on -line service Thomson Reuters Report ( " Quotation " ), which evaluates the different interest rates. The reported rates are interbank interest rates at which one bank to another would lend money (without collateral) in the money market to the letter set. The messages 25% of the highest and lowest interest rates are eliminated before from the rest of 50 %, a linear average is calculated. This avoids that an average influencing extreme values ​​are considered and distort the image. This average rate is called LIBOR and on behalf of the BBA from 11:45 London time clock of Thomson Reuters provides online world.

Since then, the group of participating currencies LIBOR has increased to 10, while the maturities of 1 day ( overnight money) are staggered over 1 week to 12 months.

Species

The LIBOR was a long time in addition to the interest rates the world's only reference interest rate. In addition to the LIBOR and FIBOR, further reference or base rates have been established late. Since January 1999, there is the EURIBOR, which is now considered a recognized reference rate within the euro area and shall be based outside the EMU for transactions in euros. He is determined and published technical such as LIBOR. This is also true for the published since January 1999 EONIA, but based on actual transactions and is therefore calculated as the amount weighted average interest rate. EURIBOR and EONIA were planned as an alternative to LIBOR from the outset by the ACI.

In the wake of LIBOR to HIBOR ( Hong Kong) or TIBOR (Tokyo) have reference rates such as LIBOR CHF ( Switzerland ), developed with the same determination rituals.

The ECB also publishes three interest rates which can be regarded as a reference rate, ie the interest rate on the main refinancing operations, the marginal lending facility and the deposit facility. All the other key interest rates international central banks such as the "prime rate" of the Federal Reserve Bank, can be regarded as a reference interest rate.

The basic savings rate is a reference rate for savings deposits with a notice period of three months. It is used in so-called cash deposits under rental agreements pursuant to § 551 paragraph 3 sentence 1 BGB as a legal reference rate for interest paid on serving as a security deposit.

For rent adjustments due to changes in Hypothekarzinssatzes applies in Switzerland since September 2008, a single reference rate. This is based on the mortgage average interest rate of banks.

Application of the reference interest rate

For interest- bearing transactions with variable interest rates and interest rate adjustment clauses (especially for credit contracts or investments, interest rate swaps or derivatives such as interest rate cap and interest rate floor and collars, floating rate notes ) of the reference interest rate throughout the Treaties will precisely defined, the interest calculation method associated with it. At the same time, a fixed charge is ( for loans ) or discount to the reference interest rate defined ( in money units), with only changes that occur in the reference rate can affect the amount of interest. Therefore, the EURIBOR is very often used for variable-rate bonds, so that they almost have no interest rate risk.

Legal Issues

In Germany the use of reference rates is recognized in particular by the case law in consumer protection. If variable interest rates charged by private customers, such banks may the "cheap discretion " under § 315 BGB apply. The Supreme Court, however, requires that interest adjustment clauses must be in the lending business of the specification of the necessary calculation parameters. Here are useful as reference rates, EURIBOR or LIBOR. If a bank unilaterally reserving an interest rate in a form-type credit contract, such a clause is generally interpreted as meaning that it only allows for an adjustment (increase or decrease) in the contractual interest on capital market- related changes in the funding conditions of the Bank in accordance with § 315 BGB. Such a clause holding the court was content control.

For deposits with variable interest rates of standard market interest rate is to be based. For variable interest rate agreement then the relative distance between the initial contract rate and the reference rate must be maintained during the entire term of the savings plan.

The legal base rate of § 247 para 1 BGB used as a reference to the interest rate for the most recent main refinancing operations of the European Central Bank. In it, a number of statutory provisions, such as § 288 para 1 and 2 BGB ( arrears), bills of exchange and check law, equity law or Civil Procedure applies.

Importance

The reference rate is internationally recognized as an important benchmark, to be able to interest rate movements and changes better judge. It shall be based on economic analysis on the interest rates. He is also an important benchmark for all sectors of the economy, which include him in planning. For very liquid money markets of the EURIBOR is deemed reliable benchmark for the level of interest rates. With the use of reference interest rates account for disputes on the basis of bank-specific interest rates that are usually difficult to understand, and conflicts over the interest rate change event. The agreement of a reference interest rate creates an automation of the interest rate changes, so does not need to be negotiated over here.

In addition to the interest rates of the central banks, the constructed reference rates have found even greater recognition as a representative reference and benchmark worldwide. These include the LIBOR, EURIBOR and EONIA. They are now used throughout the economy as a reference rate for contracts with interest rate effect.