Today, we are going to be looking into the world of international finance. The London Interbank Offer Rate (LIBOR) is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market (source). The LIBOR is fixed on a daily basis by the British Bankers’ Association. The BBA polls the contributing banks on a daily basis. The BBA website states that “every contributor bank is asked to base their bbalibor submissions on the following question; ‘At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?'” The BBA then bases the set of rates on the submissions from the banks. Submissions are not based upon actual transactions due to the fact that transactions “in a reasonable market size” do not necessarily happen every day.
So, the LIBOR is a guide to what banks should expect to pay, in order to borrow funds “in a reasonable market size” in the London interbank market. So, how does this effect me? According to the BBA website, the LIBOR is the primary benchmark for short term interest rates globally. It is used as a barometer to measure strain in money markets and often as a gauge of the market’s expectation of future central bank interest rates. According to the third edition of Corporate Finance: Core Principles & Applications, the LIBOR is a cornerstone in the pricing of money market issues and other short-term debt issues by both governments and corporate borrowers.