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It is the acronym for “London Interbank Offered Rate”. It is the interest rate at which banks lend each other money in the City of London. If it increases, it means that banks do not trust each other so much, and it could indicate that the bank lending money thinks that the other bank might have difficulties to return the loan. On the contrary, if this interest rate decreases, it could be a sign of trust in the interbank market.

Libor became official on the 1st of January 1986, a moment when the BBA interest Settlement was operating. Both of them were started in 1984 as an attempt to give more uniformity to the market in London (in loans and transfer of funds), and in this way not compromise its future growth since they noticed that London banks were increasing their transactions with the financial instruments that were starting to flourish back then (i.e.: swaps, forward contracts, etc.), rising the volume of business and debt.

Libor is fixed and published daily by the British Bankers Association (BBA), and due to the volume of transactions being very high today, Libor is one of the base rates of some of the financial instruments most traded in the world. Its importance is such, that the Swiss National bank uses it as a benchmark for its monetary policy. The calculation of Libor is according to the transactions made with financial instruments in the short term (from one day to one year) by making a list containing the interest rates belonging to 16 banks. From this list, they use the eight central values and do an average, therefore obtaining the Libor as a result. This way, we may find that Libor is very similar to euribor, in its calculation, functioning and meaning.

So, as well as euribor, Libor is a benchmark index for mortgage loans, financial derivatives, student loans, etc. Nowadays, there is some uncertainty regarding this interest rate because a fair amount of manipulation in its information has taken place affecting numerous investors, which reason why it is being considered that the interest rate should be controlled and supervised by a regulatory body.


What Is LIBOR And Why Is There So Much Fraud Surrounding It?

What Is LIBOR And Why Is There So Much Fraud Surrounding It?