LIBOR

LIBOR stands for London InterBank Offering Rate. LIBOR is

an indicative average interest rate at which a selection of
banks (the panel banks) are prepared to lend one another
unsecured funds on the London money market.
Although reference is often made to the LIBOR interest rate,
there are actually a lot of different LIBOR interest rates.
LIBOR is calculated for 7 different maturities and for 5
different currencies. The official LIBOR interest rates are
announced once a day at around 11:45 a.m. London time by
ICE Benchmark Administration (IBA). Partners of the IBA like
us may only publish the rates. This website shows the
current LIBOR interest rates daily between 5 and 6 pm
London time.

Creation of LIBOR

At the start of the nineteen eighties there was a growing

need amongst the financial institutions in London for a
benchmark for lending rates. This benchmark was
particularly needed in order to calculate prices for financial
products such as interest swaps and options. Under the
leadership of the British Bankers' Association (BBA) a
number of steps were taken from 1984 onwards which led in
1986 to the publication of the first LIBOR interest rates
(bbalibor).

LIBOR Panel Banks

As has already been indicated, LIBOR is an average interest

rate at which a selection of banks will lend one another
funds. These banks are called panel banks. The ICE
Benchmark Administration (IBA) makes the selection every
year with assistance from the Foreign Exchange and Money
Markets Committee (FX&MMC). A panel is made up for each
currency consisting of at least 8 and a maximum of 16
banks, which are deemed to be representative for the
London money market. Banks are assessed on market
volume, reputation and assumed knowledge of the currency
concerned. Because the criteria applied are strict, the rates
can generally be considered to be the lowest interbank
lending rates on the London money market.

LIBOR Calculation Method

The LIBOR interest rates are not based on actual

transactions. On every working day at around 11 a.m.
(London time) the panel banks inform Thomson Reuters for
each maturity at what interest rate they would expect to be
able to raise a substantial loan in the interbank money
market at that moment. The reason that the measurement is
not based on actual transactions is because not every bank
borrows substantial amounts for each maturity every day.
Once Thomson Reuters has collected the rates from all panel
banks, the highest and lowest 25% of value are eliminated.
An average is calculated of the 50% remaining mid values
in order to produce the official LIBOR (bbalibor) rate.

LIBOR Currencies

Originally (in 1986) LIBOR was published for 3 currencies:

the US dollar, the pound sterling and the Japanese yen. Over
the years that followed the number of LIBOR currencies grew
to a maximum of 16. A number of these currencies merged
into the euro in 2000. At the moment we have LIBOR rates in
the following 5 currencies (click on the currency for the
current interest rate for each maturity):
American dollar - USD LIBOR
British pound sterling - GBP LIBOR
European euro - EUR LIBOR
Japanese yen - JPY LIBOR
Swiss franc - CHF LIBOR

LIBOR Maturities
Because there are 7 different maturities there are a lot of
different LIBOR rates in total. Click on the maturity to see the
current euro LIBOR interest rates. Should you be interested
in the LIBOR rates in another currency, please click on one of
the links above.
Overnight (1 day)
1 week
1 month
2 months
3 months
6 months
12 months

Significance of LIBOR Interest Rates

LIBOR is viewed as the most important benchmark in the

world for short-term interest rates. On the professional
financial markets LIBOR is used as the base rate for a large
number of financial products such as futures, options and
swaps. Banks also use the LIBOR interest rates as the base
rate when setting the interest rates for loans, savings and
mortgages. The fact that LIBOR is often treated as the base
rate for other products is the reason why LIBOR interest
rates are monitored with great interest by a large number of
professionals and private individuals worldwide.

Link of US Mortgages to LIBOR

It has to do with how banks make mortgages manageable.

Let's start with a visual: Picture your mortgage like a giant
evergreen tree. Back in the old days, when you asked Main
Street Bank for a mortgage, it held your entire mortgage on
its books; it would throw that tree in the backyard. Soon,
hundreds of thick, heavy mortgage trees would pile up in the
tiny backyard of Main Street bank. If you defaulted on your
mortgage, your tree would start smoldering. Not only would
Main Street bank lose a valuable tree, but also the whole pile
could catch fire.
So big Wall Street banks stepped in and told Main Street
bank that it would be smarter to chop all of its mortgage
trees into easily handled firewood. Then Main Street bank
could keep some bundles of your mortgage-tree, and sell the
rest to other who wanted firewood.

A lot of the people who wanted to buy those firewood-sized

mortgage bundles were in Europe, and they were used to
LIBOR, the same way they were used to Celsius and metric.
So the U.S. banks started using LIBOR to set the interest
rates on all adjustable mortgages to help them sell the
firewood bundles of mortgage loans to investors in Europe.