LIBOR Explained: Understanding the London Interbank Offered Rate

LIBOR is an acronym for London Interbank Offered Rate, and is the most important benchmark for the short-term interest rate that the world’s largest banks charge one another to loan money internationally. Trillions of dollars rest on the movement of LIBOR, which, following a manipulation scandal that probably rings a bell, has been administered by ICE Benchmark Administration (IBA) since 2014. LIBOR is computed once a day when all the major London banks report how much they expect to pay on a loan from other banks—the top quarter estimates are thrown out, as are the bottom quarter, and LIBOR is an average of the rest.

LIBOR does not denote one specific number; in fact it’s expressed in euros, US dollars, British pounds sterling, Japanese yen and Swiss franc and in seven maturities, ranging from overnight to twelve months. However, if someone references LIBOR without specifying which of the 35 daily rates offered, it’s likely they’ll be referencing the most-cited rate, the three-month U.S. dollar rate, commonly known as the “current LIBOR rate.” LIBOR not directly dictates the rates of mortgages and credit card interest rates, it is an important benchmark for determining the health of various countries’ central banks as well. In addition, LIBOR serves as the primary benchmark for measuring the value of derivatives, those complicated (sometimes unregulated) financial instruments deemed one of the primary causes of the 2008-2009 global financial crisis.