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The Story of the Man Who Revolutionized International Banking

Finance By
The Man Who Invented the World's Most Important Number
(Matthew Lloyd/Bloomberg via Getty Images

 

If your guess for the man who invented the world’s most important number was Sesame Street‘s Count von Count, that’s creative but wrong. That feat goes to Greek banker Minos Zombanakis, who came up with what is known as Libor, or the benchmark rate that many of the world’s top banks charge one another for short-term loans, per Investopedia. (It was also used to get around strict U.S. banking regulations at the time.)

Per Bloomberg, Zombanakis first used Libor in London to secure a loan for the financially struggling Iranian government in the late ’60s, and it was “… one of the first to charge a variable rate of interest that reflected changing market conditions and to be split among a group of banks,” notes the publication.

The idea was to split up a loan amongst a number of foreign and domestic banks, each of which taking on a portion of the risk. It worked like so, per Bloomberg:

“[It charged] borrowers an interest rate recalculated every few months and funding the loan with a series of rolling deposits….The banks in the syndicate would report their funding costs just ­before a loan-rollover date. The weighted average, rounded to the nearest eighth of a percentage point plus a spread for profit, became the price of the loan for the next period. Zombanakis called it the London interbank offered rate [i.e. Libor].”

Read Bloomberg‘s full feature on Zombanakis’ groundbreaking number here. Learn why the Financial Times think economists should pay attention to Libor in the video below.

 

RealClearLife Staff