What is LIBOR?
LIBOR (London Interbank Offered Rate) or ICE LIBOR (previously BBA LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It stands for Intercontinental Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. LIBOR is administered by the ICE Benchmark Administration (IBA), and is based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF), and serves seven different maturities: overnight, one week, and 1, 2, 3, 6 and 12 months. There are a total of 35 different LIBOR rates each business day. The most commonly quoted rate is the three-month U.S. dollar rate.
What is LIBOR used for?
The Libor is widely used as a reference rate for many financial instruments in both financial markets and commercial fields. There are three major classifications of interest rate fixings instruments, including standard interbank products, commercial field products, and hybrid products which often use the Libor as their reference rate.
How is LIBOR defined?
Libor is calculated by the Intercontinental Exchange (ICE) and published by Thomson Reuters. It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties. Each day, the BBA surveys a panel of banks (18 major global banks for the USD Libor), asking the question, “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” The BBA throws out the highest 4 and lowest 4 responses, and averages the remaining middle 10, yielding a 23% trimmed mean. The average is reported at 11:30 am.
LIBOR is actually a set of indexes. There are separate LIBOR rates reported for 7 different maturities (length of time to repay a debt) for each of 5 currencies. The shortest maturity is overnight, the longest is one year. In the United States, many private contracts reference the three-month dollar LIBOR, which is the index resulting from asking the panel what rate they would pay to borrow dollars for three months.
What banks are the contributors to LIBOR?
The panel contains the following member banks:
1. Bank of America
2. Bank of Tokyo-Mitsubishi UFJ
3. Barclays Bank
4. Citibank NA
5. Credit Agricole CIB
6. Credit Suisse
7. Deutsche Bank
9. JP Morgan Chase
10. Lloyds Banking Group
12. Royal Bank of Canada
13. Société Générale
14. Sumitomo Mitsui Banking Corporation Europe Ltd
15. Norinchukin Bank
16. Royal Bank of Scotland
17. UBS AG