Libor, or London Interbank offered rate, is a combination of interest rates, expressed in various currencies that determine global rates for debt financing. Libor is the interest rate that banks loan money to each other at. This rate has enormous trickledown effect, meaning whatever Libor is at on any given day greatly impacts the rates at which corporations can loan money from banks, the rates individuals pay for loans, and prices of derivatives. The Libor rates are produced in 5 different currencies, CHF(swiss), JPY(japan), EUR(Europe), GBP(Britain) and USD(America) and seven different tenors, Overnight spot, 1 week, 1 month, 2 months, 3 months, 6 months, and 12 months. These rates are determined based on the submission from 11 to 16 banks from each of the 5 currencies everyday, creating 35 different rates every London business day.
The significance of Libor is much more substantial than many would believe, and actually extends deeply into the lives off all of us, probably without most knowing it. It is a benchmark rate that has large influence over government and corporate bond rates, credit card debt, bank loans, mortgages, and student debt financing. Libor is a large reason adjustable rate mortgages are so risky, especially when financial institutions are over exposed to debt, because if the Libor rate increases, and banks then have to pay much higher rates to cover that exposure by borrowing money from another bank, the rate we pay then will increase drastically as well. This is what allowed the 2008 financial crisis to become a worldwide economic downturn. Banks literally had no cash and couldn’t secure loans from other banks with such little liquidity; when adjustable rates kicked-in in late 2007, mortgage bond value began to cripple, causing Libor to spike. Banks had a daunting amount of debt exposure and didn’t think anyone would pay them back. Meaning, since the risk was much greater to loan money at that time, they would only agree if the other party signed into paying very high interest on the loan–risk per reward.
Libor has been a major talking point since 2012 when a scandal was uncovered showing banks worldwide had been misrepresenting rates to manipulate derivative markets, boost profits, and mislead the public on their stability. For a rate that the entire world relied on to accurately measure and price debt, this was a BIG problem.
Get Off My Case! 
LIBOR is an interesting system, I did not know about it before. I hope that we can control our economy enough in the future to not cause any more depressions.
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yeah I think that’s all we could ask for. With such an important reference point for financial markets keeping it truthful will certainly help curb financial bubbles.
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Libor is a uniquely important rate that drastically causes a ripple effect and impacts day to day operations of all financial institutions. I think that it did contribute to the financial Crisis when everything was going poorly. You can almost think of the Libor rate being the glue that links banks together. Drastic fluctuation in this rate is not beneficial to the economy at all (obviously).
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Yeah, in this past case Libor didn’t necessarily cause the economic downturn but it certainly mislead people regarding financial stability once we were in a recession.
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It is interesting to see the global repercussions when the LIBOR system comes under siege of scandal. When the entire world’s financial system depends primarily on one rate, it opens the entire financial system to untold liability.
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Yeah it really does. It was one part of our global economic system I think no one expected to be fraudulent or messed with.
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It’s interesting to see how much of an effect the rates have on banks and their loans in relation to one another. I feel as though LIBOR is not well known to many people and is something many are unaware of.
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For sure. Only people involved in finance are usually aware of its presence and importance yet it plays such a big role in everyone life.
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