How Internet Bank Rates are Configured

Internet bank rates are determined in the same manner that bank rates are for non-internet banks. That a bank is an internet bank does not mean that there is a different or special process used for determining or configuring rates. The steps for configuring rates for internet banks include a determination of the rates used between banks, known as the London Interbank Offered Rate (LIBOR), setting rates based on the credit ratings of its customers and making adjustments for those considerations.

The process of setting rates involves an in-depth understanding of interest rates, how they move relative to the economy and the cost of money to a lender. This discussion is beyond the scope of this article as it involves many advanced time-value of money and money and banking principles fit for an upper-level college course. The steps described below discuss more abstract concepts associated with setting bank rates.

Step 1: Determine the LIBOR Rate

An internet bank looks at the prevailing LIBOR rate in order to determine the baseline rate that it will charge on loans. The LIBOR is a daily rate that banks use to charge each other on unsecured funds that are exchanged on a nightly basis. The transactions that take place between banks ensure that the banking system is properly capitalized and liquid. The LIBOR is the lowest rate that banks charge for the use of money, which they make available to customers in the form of loans.

Determining the LIBOR means that the banks financial operations actively watch the money markets both domestically and overseas to see what rate money (currency) is trading at. The bank will apply the same techniques for pricing loans based on the information in the markets. This technique is the same regardless of the bank’s location.

Step 2: Compare Rates Based on Customer Type

The internet bank will apply the LIBOR to their customer base in accordance to a ranking or risk rating criteria. Those customers that are more creditworthy tend to receive better rates than those with lower credit ratings. Prime customers will be given loan rates that are closer to the LIBOR rate that the internet bank used in its configuration. The lower a customer is on the rating scale, the higher the rate that will ultimately be charged.

Step 3: Adjust Rates for Credit Considerations

Adjustments will be made for different types of customers based on other factors that may be important to the internet bank. Credit is a key consideration in this adjustment as well as existing customer relationship, collateral and down payments, which are used to lower the loan-to-value ratio.

Conclusion

It should again be noted that an internet bank approaches the process of configuring rates in the same manner as traditional non-internet banks.

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