“What Is” Libor?

liborThe London Inter-Bank Offer Rate (Libor) is the estimated interest rate, fixed daily, that banks in London use for bank-to-bank borrowing. Overseen by the British Bankers Association (BBA), Libor is calculated by producing the average interest rate submitted by the 18 most credit-worthy banks. Established by the BBA in 1986, Libor has become the global benchmark for short-term interest rates.

Libor rates, calculated for 10 currencies and for 15 borrowing periods, are distributed by Thompson Reuters and other financial services publishers. It is estimated that about $350 trillion across the globe is governed by the Libor guidelines.

Although there are other Libor variations and interest rate benchmarks, Libor is considered to be the most expansive and useful. In addition to loans, Libor is also used as a basis for calculating rates for mortgages, savings and derivatives.

Libor has been getting greater attention over the past two years because of a rigging scandal on the part of major contributors to the Libor calculation during the Great Recession. Since the scandal broke, regulators across the globe have refocused their efforts to guarantee the integrity of the Libor benchmark.

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