Panel Bank

Definition

A panel bank is a financial institution that contributes to the calculation of key benchmark interest rates, such as LIBOR, by submitting its estimated borrowing rates. These banks play a crucial role in the determination of the rate since their collective submissions create a benchmark that reflects the overall market sentiment on borrowing costs among banks.

5 Must Know Facts For Your Next Test

1. Panel banks are selected based on their size, creditworthiness, and the volume of transactions they engage in, ensuring that they represent a significant portion of the market.
2. The submissions from panel banks are used to calculate average rates, which are then published as benchmark rates that impact various financial products, including loans and derivatives.
3. Panel banks can be subject to regulations and oversight to ensure transparency and accuracy in their rate submissions, especially following past scandals related to rate manipulation.
4. The number of panel banks may vary over time due to changes in the regulatory environment or market conditions, impacting the robustness of the benchmark rates they help to set.
5. Since the move away from LIBOR due to concerns over its reliability, many panel banks have begun participating in alternative benchmark rate systems, such as SOFR (Secured Overnight Financing Rate).

Review Questions

• How do panel banks contribute to the calculation of benchmark interest rates like LIBOR?
  • Panel banks contribute to the calculation of LIBOR by submitting their estimated borrowing rates daily. The average of these submissions is calculated to establish the LIBOR rate for various maturities. This process allows the collective input from multiple reputable banks to reflect market conditions accurately and provides a reliable benchmark for financial transactions.
• Evaluate the importance of panel banks in maintaining the integrity and reliability of benchmark rates.
  • Panel banks are essential for maintaining the integrity of benchmark rates like LIBOR because they represent a cross-section of the banking industry, reflecting diverse market conditions. Their submissions must be accurate and honest to ensure that benchmark rates are credible and reliable. Regulatory oversight has been increased post-scandals to safeguard against manipulation, emphasizing the vital role that panel banks play in fostering trust in financial markets.
• Assess the implications of transitioning away from LIBOR for panel banks and the broader financial market.
  • The transition away from LIBOR has significant implications for panel banks and the broader financial market. As new benchmark rates like SOFR gain prominence, panel banks must adapt their operations and reporting practices to comply with these new standards. This shift also requires recalibrating existing financial contracts tied to LIBOR, affecting pricing and risk management strategies across various financial instruments. The overall impact includes increased complexity in market transactions and potential disruptions during the transition period as both lenders and borrowers adjust to new benchmarks.

Related terms

LIBOR: The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another, calculated based on submissions from panel banks.

Benchmark Rate: A benchmark rate is a standard against which the performance of financial instruments is measured, serving as a reference for pricing loans and other financial products.

Interest Rate Swap: An interest rate swap is a financial derivative where two parties exchange interest rate cash flows, typically swapping fixed-rate payments for floating-rate payments linked to a benchmark like LIBOR.