What is LIBOR???

LIBOR stands for London InterBank Offered Rate, which is a guide world-wide for the rate banks use to lend to each other. In the U.S., it is usually not far off from the Fed Funds rate.

As a result of the 2007 Banking Liquidity Crisis, banks have become afraid to lend to each other, and so LIBOR has risen independently of the Fed Funds rate. The Fed is trying to lower LIBOR so banks can get back in the business of lending to each other, but it hasn't been working as well as the Fed would like. In fact, LIBOR may not return to its normal cozy relationship to the Fed Funds rate until the financial markets stabilize. (See Fed Governor Kroszner Says Credit Crisis May Not Be Over, 10/22/07)

How It Affects You

Most adjustable rate mortgages and credit card interest rates are based on LIBOR. As rates reset, the high LIBOR makes the monthly payment also higher. This will cause a financial hardship to you, if you have that type of mortgage. Even if you don't, and you pay your credit card in full each month, a higher LIBOR rate will reduce liquidity in the economy.









The London Interbank Offered Rate (or LIBOR, pronounced /ˈlaɪbɔr/) is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market). Alternatively, this can be seen from the point of view of the banks making the 'offers', as the interest rate the banks will lend to each other, that is 'offer' money in the form of a loan for various time periods (maturities) and in different currencies.

LIBOR rates are widely used as a reference rate for financial instruments such as

• forward rate agreements
• short-term-interest-rate futures contracts
• interest rate swaps
• inflation swaps
• floating rate notes
• syndicated loans
• variable rate mortgages^[1]
• currencies, especially the US dollar (see also Eurodollar).

They thus provide the basis for some of the world's most liquid and active interest-rate markets.

For the Euro, however, the usual reference rates are the Euribor rates compiled by the European Banking Federation, from a larger bank panel. A Euro LIBOR does exist, but mainly for continuity purposes in swap contracts dating back to pre-EMU times. LIBOR is an estimate and not interred in the legally binding contracts of an LLC. It is however specifically mentioned as a reference rate in the market standard International Swaps and Derivatives Association documentation, which are used by parties wishing to transact in over-the-counter interest rate derivatives.

LIBOR is used by the Swiss National Bank as their reference rate for monetary policy