What is LIBOR?

The London Interbank Offered Rate is commonly referred to as LIBOR, an acronym to shorten the term for easier usage. It is based on the interest rates at which banks borrow unsecured funds from banks in the London wholesale money market also referred to as the interbank market. It is similar in reference to the U.S. Federal funds rate which are both daily reference rates. It is an objective standard on which a lender may base it's estimated cost of funds, when entering a variable rate contract with a mortgagor. This assures the increases or decreases due to a borrower are not arbitrary at the discretion of the lender, but are in fact reflective of a true cost of money in the financial world.LIBOR can be defined as: The rate at which an individual Contributor Panel bank could borrow funds by asking for and accepting inter-bank offers in reasonable market size, just prior to 11.00 London time.This LIBOR definition is further described as follows:

• The rate at which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market.

• Contributions must represent rates formed in London and not elsewhere.

• Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange markets.

• The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank’s cash, rather than a bank’s derivative book.

• The definition of “funds” is: unsecured interbank cash or cash raised through primary issuance of interbank Certificates of Deposit.

We hope this has been useful to you in determining the applicable relationship between a LIBOR rate & the market.

For more historical information on how LIBOR has performed additional research may be needed.

Additonal Financial Terminology may be found in the Finance Dictionary