All bank lending, domestic or international, which bears a variable rate of interest requires a marker to which the interest rate is linked. The marker may be announced by the bank, as with prime rate in the U.S., or it may be a market rate such as LIBOR (London Interbank Offered Rate), or a rate set by the government or central bank, such as the German Lombard rate. Announced rates often include a margin intended to compensate for the minimum cost and risks the bank undertakes and to provide a profit. Market rates are a notional or actual indicator of the cost of money, to which the bank adds a similar margin. Government or central bank rates are more of a proxy for cost of money than an indicator, but also require a margin.
KeywordsCredit Risk Foreign Bank Interbank Market Marker Rate American Bank
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