The ins and outs of Libor

Julie Brownlee, Fsp Invest, 13 Oct. 2015

Tags: libor, what is libor, london interbank offered rate, how to use libor, libor rigging,

It wasn’t too long ago when the authorities in the UK and the US were pointing fingers at traders for manipulating Libor.

So what exactly is Libor? And what can Libor tell you?

Let’s take a closer look…

What is Libor?

Libor stands for the London Interbank Offered Rate. To put it in simpler terms, Libor is the interest rate that some of the world’s leading banks use to charge each other for short-term loans in sterling.

In the UK, it’s the most important rate.

Around $450 trillion worth of financial contracts, such as loans, home loans and currency swap deals, use this figure as their basis.

Each day, the Intercontinental Exchange (ICE) fixes the Libor rate. It does this by working out the average interest rates banks will lend to each other in the London market.

What Libor shows

Libor is a good indicator of what’s happening in the global markets and it reacts to developments.

It shows how strong the banking sector is at any one time. And it reflects how global markets are responding to what’s going on.

For example, after the financial crisis hit in 2008, Libor soared. Banks were too scared to lend to any other banks in case they went insolvent.

There are Libor-equivalent rates in other currencies too, including the euro and the US dollar.

Libor hit the headlines in 2012 when traders from a number of banks were found to have manipulated the rate for profit. This led the UK government to make it illegal to conspire to influence Libor rates.

Court cases are still going on with traders standing trial in the US for their parts in manipulating Libor.

So there you have it. The ins and outs of Libor.

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