LIBOR stands for London InterBank Offered Rate (aka ICE LIBOR) is the benchmark interest rate for interbank short-term unsecured loans.
LIBOR is calculated based on submission of interest rates by panel banks (ICE LIBOR Currency Panels), that they expect they would be charged by others for borrowing money.
So, LIBOR is an average rate at which a contributor bank can get unsecured short-term loans in the London interbank market. It is not based on actual market transactions, rather on expert judgment of banks.
At present, LIBOR is calculated for 5 different currencies and for 7 different periods. That is 35 different rate is provided for each business day.
LIBOR Currencies are:
- USD (US Dollar)
- GBP (Pound Sterling)
- EUR (Euro)
- JPY (Japanese Yen)
- CHF (Swiss Franc)
LIBOR Maturity periods are:
- Overnight (1 day)
- 1 week
- 1 month
- 2 months
- 3 months
- 6 months
- 12 months
LIBOR is very popular globally. It is considered as the base rate for short-term loans, debt instruments including government and corporate bonds etc across the world. Also, a great number of retail financial products such as mortgages, students loans, credit cards are designed based on LIBOR rate.
It is considered as the basis for settlement of major interest rate contracts such as futures, options, and swaps worldwide.
LIBOR is now administered by ICE Benchmark Administration (IBA). That is why it is also called as ICE LIBOR (Intercontinental Exchange LIBOR), before then it was administered by British Bankers Association and was known as BBA LIBOR.
Significant Info: Financial Conduct Authority, UK is thinking about an alternative index of LIBOR as reference rate by the end of 2021. FCA’s view is reference rates should be based on market transactions not judgments and it is not desirable for market participants to rely indefinitely on reference rates that do not have active underlying markets to support them.