LIBOR i.e. London Inter-bank Offered Rate is a benchmark standard for short term interest rate, it is an interest rate at which banks can borrow funds from other banks in the London interbank market.
LIBOR rates were first used in financial markets in 1986. From then on LIBOR has been growing in stature and today it is the key reference rate for financial products worth about $350 trillion. Many a times a small change in the LIBOR can cause ripples in the money market.
LIBOR is fixed on a daily basis by the British Bankers’ Association and is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates. LIBOR is administered by the ICE Benchmark Administration (IBA), and is based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF), and serves seven different maturities: overnight, one week, and 1, 2, 3, 6 and 12 months. There are a total of 35 different LIBOR rates each business day. The most commonly quoted rate is the three-month U.S. dollar rate.
One of the prominent trait of LIBOR or ICE LIBOR is that it helps to evaluate the current state of the world’s banking system as well as to set expectations for future central bank interest rates. Current form of LIBOR is known as ICE LIBOR, which was previously known as BBA LIBOR until February 1, 2014 [On this date ICE Benchmark Administration (IBA) took over the Administration of LIBOR]