posted on 06-06-2019

London Interbank Offered Rate (LIBOR)

Updated October 2, 2019

What Is LIBOR?

The London Interbank Offered Rate (LIBOR) is the base lending rate banks charge each other in the London wholesale money market.

How LIBOR Works

LIBOR is an average of inter-bank deposit rates offered by members of the British Bankers Association (BBA). It is based on five currencies: the US dollar, euro,  British pound, Japanese yen, and Swiss franc. The Intercontinental Exchange (ICE) calculates and publishes LIBOR each day.

Because of its basis on supply and demand, LIBOR is used as the rate of reference for many securities around the globe. There are 35 different LIBOR rates, each corresponding to varying maturity dates and currencies. However, the three-month U.S. dollar rate, typically referred to as the "current LIBOR rate," is the most commonly quoted rate.

Why LIBOR Matters

LIBOR is one of the most widely used benchmarks for short-term interest rates and is unlike the prime rate in the U.S., which is somewhat arbitrarily based on certain banks' lending costs plus a profit margin.

Borrowers generally support the use of LIBOR in interest-rate calculations because it represents a true market rate and is generally lower than the U.S. prime rate.