UK Accounting Glossary
LIBOR stands for London Inter-Bank Offered Rate. It’s the rate of interest at which banks offer to lend money to one another in the so-called wholesale money markets in the City of London. Money can be borrowed overnight or for a period in excess of five years.
The most often quoted rate is for three-month money. ‘3 month LIBOR’ tends to be used as a yardstick for lenders involved in high-value transactions. They tend to quote rates as ‘points above LIBOR’. So if 3 months LIBOR were (say) six per cent, a bank may choose to lend to another bank at (say) 6 and a quarter per cent. e.g. a quarter per cent above 3 month LIBOR.
Lending to individuals tends to be based on the base rate which is set by the Bank of England. Base rates tend to be less volatile.
The LIBOR rates are set each day at 11 am by leading banks, but rates fluctuate throughout the trading session according to sentiment about the outlook for base interest rates.
LIBOR stands for London Interbank Offered Rate.
The British Bankers’ Association calculates LIBOR in an open manner each business day.
LIBOR rates are generally released around 11 am London time. Many LIBOR rates exist, for various multiple short-term periods in a number of currencies. For example, each day LIBOR rates are released, there is a 1 week Japanese Yen LIBOR rate, a 1 month US dollar LIBOR rate, and 6 month Euro LIBOR rate. LIBOR is the primary benchmark for interest rates around the world. Interest rate contracts traded on many exchanges around the world, such as the Chicago Board of Trade, settle based on LIBOR. LIBOR affects consumers, too, as LIBOR is often used as a benchmark for ARMs and other credit products.
Libor is the short form of ‘London interbank offered rate’. This is that interest rate, which is charged by top banks when they lend to each other. This rate of interest is used as a benchmark by banks for calculation of other types of the interest rate charged by them on other varieties of loan. It may be noted that Libor is essentially a floating rate. It keeps on changing with time. In simple terms, Libor is that the average rate of interest, which is charged when banks in London’s interbank market borrow funds (unsecured variety) from one another. There exist different Libor rates for different currencies. Libor was adopted by the world banking system in the mid-1980s to act as a standard for interbank loans, which were short-term. At present, Libor rates have received international recognition. They are used for pricing different types of corporate loans as well as consumer loans, debt securities and debt instruments worldwide. For instance, Libor is considered as a reference rate of interest for a wide array of US interest-only loans. British Bankers’ Association (BBA) fixes Libor rates each UK business day. When BBA fixes Libor rates, which have US dollar denominations, it polls a panel of reputable banks (with high volume), which take part in London wholesale money market. This is done to find out that rate at which these selected banks lend their Eurodollars for specified maturities. BBA calculates central tendency figures, specifically interquartile mean for all such maturities. It then publishes those calculated figures at around 11:30 a.m. GMT. LIBOR rates are listed each morning in the FT and other newspapers.
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This glossary post was last updated: 10th February 2020.