LIBOR Explained. What are LIBOR Rates

LIBOR, an acronymn for London Interbank Offered Rate has become a standard for banks in most countries such as the US, Canada, Australia, Japan, Denmark, New Zealand, Switzerland and of course the UK as a reference rate for borrowing or lending marketable loans between banks. LIBOR rates, compiled by the British Bankers Association (BBA) are published everyday at 11 GMT. The BBA dates back to the early 1980’s and was first used in the financial markets in 1986.

The LIBOR rates, compiled by BBA is made up participating banks representing countries in each of the quoted currencies (AUD, CAD, DKK, EUR, JPY, USD, NZD, GBP, SEK, CHF). The banks mention what rate they would be charging for the currency during a specified period of time, which could from overnight loans to as long as 12 month loans. Based on this survey, LIBOR rates are published accordingly. It is estimated that around 20 banks participate in this survey which affects close to $10 trillion of various financial products worldwide, ranging from adjustable rate mortgages, home loans, small business loans, student loans and credit cards.

The participating banks on the LIBOR panel are reviewed twice a year as compared to an annual review prior to May 2009. The panel banks are selected by the Foreign Exchange and Money Markets Committee and chosen, amongst other criteria the bank’s scale of activity on the London markets and their percieved expertise. Any bank can apply to the LIBOR panel.

How is the LIBOR rate useful

LIBOR rates, although primarily serve as a guide for interbank borrowing and lending, also has its effects on certain financial products such as adjustable rate loans, interest only mortgages and credit cards. Lenders tend to add a point or two above the published LIBOR rates in order to create a profit.

In most cases of daily life, LIBOR rates don’t directly effect individuals. When a country’s interest rate environment is stable when the economy flourishes, all is well with the LIBOR. However, during uncertainty in the economic environment, more so with the participating countries, LIBOR rates can be extremely volatile even making it harder for interbanks to borrow or lend the loans. This volatility is then passed down to individuals looking for loans. To put it in perspective, when LIBOR interest rates are volatile, the banks you want to get a loan from will charge a higher interest rate in order to cover the volatility.

LIBOR Panel – List of participating banks

At the time of writing this article, the following banks make up the LIBOR panel for the respective currencies.

The effect of LIBOR rates in the foreign exchange markets is more relevant to currencies such as the EUR, GBP, JPY and has less relevance on the US Dollar directly but does affect the USD held in foreign banks. LIBOR rates aren’t that popular especially amongst individuals, although they are looked upon and taken notice by investors. However, if you own a credit card or have a mortgage or plan to take a loan, it is always good to check on the LIBOR rates before you set forth.