Generally, why would/do banks use LIBOR as the base rate for a loan? We use prime for everything here, and the only thing I can think of would have to do with it being an international deal (which doesn't explain why they'd use LIBOR locally).
I've just been wondering about that. Thanks!
Full Version: LIBOR?
Choosing to go with a LIBOR based loan is more a function of the competitiveness of the market and the sophistication of the borrower.
For example, a lot of large deals involving corporate customers whose funding requirements require the loans to be participated among a syndicate of banks are usually LIBOR based.
It is also common for these deals to have options as to the rate to be charged. You might have both a prime based rate and a LIBOR based rate for one type of advance. The bigger the customer, the more common the use of LIBOR.
You will also find that a lot of the large regionals like to offer these type of pricing and in order to compete, you have to go back to the customer with a similar structure so that it is easier for the customer to compare loans.
It really doesn’t matter in the end what base rate you use, because you can move around the premium or discount in order to get the same number.
For example, a lot of large deals involving corporate customers whose funding requirements require the loans to be participated among a syndicate of banks are usually LIBOR based.
It is also common for these deals to have options as to the rate to be charged. You might have both a prime based rate and a LIBOR based rate for one type of advance. The bigger the customer, the more common the use of LIBOR.
You will also find that a lot of the large regionals like to offer these type of pricing and in order to compete, you have to go back to the customer with a similar structure so that it is easier for the customer to compare loans.
It really doesn’t matter in the end what base rate you use, because you can move around the premium or discount in order to get the same number.
QUOTE
It is also common for these deals to have options as to the rate to be charged. You might have both a prime based rate and a LIBOR based rate for one type of advance. The bigger the customer, the more common the use of LIBOR.
Why would the 'peg' used related to the competitiveness of the market? I understand a sophisticated borrower would understand LIBOR, and the average small business owner would only ever hear about prime.
I understand that it is more common for larger deals to have more options offered, but I'm wondering why they (the syndicates, etc) would prefer to use LIBOR instead of prime. Do they (have the potential to) move differently - I would think so.
QUOTE
You will also find that a lot of the large regionals like to offer these type of pricing and in order to compete, you have to go back to the customer with a similar structure so that it is easier for the customer to compare loans.
I know we could play with the premium/discount on either peg to have them two options have the same rate. I guess I'm wondering why the preference goes toward LIBOR in bigger deals, or with bigger customers, or with bigger banks. Is that another industry thing that's "just the way it is"?
” Why would the 'peg' used related to the competitiveness of the market?” I meant that comment as in you will probably have to offer a LIBOR based product if the competitor is offering those.
” why they (the syndicates, etc) would prefer to use LIBOR instead of prime.” You know, I really never thought of that, but they do. The larger the institution and the more syndicated deals the lender is involved is the more frequent LIBOR based loans are. For example, I started working at a bank with less than $100MM in assets and never saw a LIBOR based loan. I saw a few at my second bank {about $3,500MM in assets}, but I have seen many at my current employer, which is considerably bigger.
Now I could make some educated guesses, which are pretty much off the top of my head.
First, I would think that maybe there is a shift to this type of “base rate” due in part to the increasing internationalization of finance. Second, it could be psychological since the loan officer might want to use LIBOR to make it an easier sell to his superiors {loan committee or whomever has the lending authority to approve the loan}.
After all, what sounds better:
Prime less 100 basis points {denoting a discount} or Thirty day LIBOR plus 190 basis points {denoting a premium}?
” Do they (have the potential to) move differently” You know one of our EVPs made this comment in one of our committees, but I really never researched historical prime and LIBOR to see which one reacts first or lags. If I had to guess, LIBOR is going to change first in the case of a significant rate shift. After all that rate is set daily if I am not mistaken...
” Is that another industry thing that's "just the way it is"?” I blame it on lenders trying to appear sophisticated.
” why they (the syndicates, etc) would prefer to use LIBOR instead of prime.” You know, I really never thought of that, but they do. The larger the institution and the more syndicated deals the lender is involved is the more frequent LIBOR based loans are. For example, I started working at a bank with less than $100MM in assets and never saw a LIBOR based loan. I saw a few at my second bank {about $3,500MM in assets}, but I have seen many at my current employer, which is considerably bigger.
Now I could make some educated guesses, which are pretty much off the top of my head.
First, I would think that maybe there is a shift to this type of “base rate” due in part to the increasing internationalization of finance. Second, it could be psychological since the loan officer might want to use LIBOR to make it an easier sell to his superiors {loan committee or whomever has the lending authority to approve the loan}.
After all, what sounds better:
Prime less 100 basis points {denoting a discount} or Thirty day LIBOR plus 190 basis points {denoting a premium}?
” Do they (have the potential to) move differently” You know one of our EVPs made this comment in one of our committees, but I really never researched historical prime and LIBOR to see which one reacts first or lags. If I had to guess, LIBOR is going to change first in the case of a significant rate shift. After all that rate is set daily if I am not mistaken...
” Is that another industry thing that's "just the way it is"?” I blame it on lenders trying to appear sophisticated.
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