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London Interbank Offered Rate - LIBOR

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Definition of 'London Interbank Offered Rate - LIBOR'

An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.
Investopedia Says

Investopedia explains 'London Interbank Offered Rate - LIBOR'

The LIBOR is the world's most widely used benchmark for short-term interest rates. LIBOR rates were first used in financial markets in 1986 after test runs were conducted in the previous two years. Today, LIBOR has reached such stature that the rate is published daily by the BBA at about 11:45 a.m. GMT. LIBOR is set by 16 international member banks and, by some estimates, places rates on a staggering $360 trillion of financial products across the globe LIBOR is important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points.

Another prominent trait of LIBOR is that it can dilute the effects of Fed rate cuts. Most investors think it's great when the Fed cuts rates, or at least they welcome the news. If LIBOR rates are high, the Fed cuts look a lot like taking a vacation to Hawaii and getting rain every day. High LIBOR rates restrict people from getting loans, making a lower Fed discount rate a nonevent for the average person.

Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the United Kingdom.

To learn more about the basics of LIBOR go here.

Barclays, and allegedly other banks, during the 2007-2009 period and earlier, took into account traders' requests for them to submit, and submitted artificially low LIBOR rates so as to project an appearance of strength to one another in parlous circumstances and roiled markets. One could make a potential case for such posturing being in the public interest. The other motivation to do so was to boost traders' profits. The rate-setting process appears, at best, translucent and arbitrary, and at worst, potentially fraudulent. To learn more about the LIBOR scandal, go here.

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