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Sujai Adithya
Business Development and Banking & Financial Services Expert
Asked a question last year

What is LIBOR? What is its significance?

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Sujai Adithya
Business Development and Banking & Financial Services Expert

LIBOR stands for London Inter Bank Offered Rate. LIBOR is the benchmark/reference for average interest rates – used by the A-Grade banks as “Offer” for lending their funds to the A-Grade banks as unsecured loans in marketable lot in London based interbank transactions.

The ten constituent currencies of LIBOR used to be USD, GBP, Euro, Swiss Franc, Canadian Dollar, JPY, Danish Krone, Swedish Krona, Australian Dollar and New Zealand Dollar. LIBOR used to be calculated and published by Thomas Reuters on behalf of British Bankers’ Association. 

CALCULATIONS: 

  • A survey is made of the interest rate quotations from 18 major London based global banks on the beginning of every business day in London – at which rate they are willing to “Offer” their funds as unsecured funding to other A-grade borrower banks.
  • Out of the 18 responses, the four highest quoted rates and the four lowest quoted rates are deleted and an Arithmetical Mean is arrived of the remaining 10 responses.

SIGNIFICANCE: 

  • LIBOR is used by different A-Grade banks either for interbank lending of the surplus funds or for interbank borrowing for meeting their short term liquidity requirements.
  • LIBOR has been in use as a reference/benchmark rate by the financial institutions for deciding interest rates for the different financial instruments.
  • The developed countries like Canada, U.K., U.S.A. and Switzerland rely on LIBOR as a reference/benchmark rate. LIBOR is also used by the well-known multinational commercial corporations.