The Plumbing Of The World's Financial System Has Been Replaced — And Almost Nobody Noticed

The Plumbing Of The World's Financial System Has Been Replaced — And Almost Nobody Noticed

Felix Salmon  Tue, December 28, 2021, 7:00 AM·2 min read

Banks and regulators around the world have managed to replace the plumbing of the entire financial system, even as almost nobody has noticed.

Driving the news: As of Monday, Libor — the interest rate that once underpinned some $300 trillion in financial contracts from derivatives to corporate credit lines — will effectively be dead.

Why it matters: The easily-manipulable Libor was at the center of one of the biggest scandals in the history of finance, which came to light back in 2012.

Banks racked up some $9 billion in fines and a number of traders received prison sentences.

Libor has now been replaced with much more solid and reliable benchmarks.

How it works: Banks make money from lending money out at a higher interest rate than their own cost of funds. Libor was supposed to be a measure of banks' cost of funds, so if a bank priced a loan at, say, 1 percentage point over Libor, then it knew its profit margin would be 1 percentage point.

Trillions of dollars of loans and derivatives were traded based off Libor, which meant that if traders could — illegally— push it up or down by even a few hundredths of a percentage point, they could make enormous sums of money.

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https://news.yahoo.com/end-era-lending-120056573.html?fr=sycsrp_catchall