London Interbank Offered Rate

The London Interbank Offered Rate, commonly dubbed the LIBOR, is an interest rate at which banks lend each other money.

Expanded Definition

LIBOR is compiled each day by the British Bankers' Association (BBA) and Reuters. The association looks at a group of international banks -- each participating in the London market -- to determine how much banks are charging each other for loans ranging in duration from overnight to one-year. If it costs banks more to borrow money from each other, it's most likely going to cost you more to borrow money from the banks. LIBOR is a benchmark for short-term lending rates; it can change daily. Transactions tied to it can include adjustable-rate loans, interest-only mortgages, and credit card debt.

LIBOR sounds a lot like the federal funds rate and the related prime rate, but it is different. The federal funds rate is set by the Federal Open Market Committee to further American monetary policy. LIBOR uses a preset formula to determine what's happening among a chosen group of banks from around the world that use different currencies.

The London Interbank Offered Rate officially came into existence in 1986. The BBA is "the voice of the banking industry for all banks who operate within the U.K.," according to the association's website. It had 223 banking members from 60 countries as of September 2008.

Related Fool Articles

• The Day Banks Froze Has a great discussion of LIBOR and how it affects banking.

Related Terms

• Adjustable-rate mortgage (ARM)

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