What is Libor and why does it matter?
“Rate underpins contracts worth 5 times global GDP”
LIBOR rates are one of the foundations of the finance industry. It is the interest rate that shows how much it costs for banks to borrow money from each other, and it matters because it underpins financial contracts worth an estimated $300 trillion worldwide – this is over five times global GDP
It was developed in the 1980s to simplify the pricing of interest-rate derivatives and syndicated loans, and it quickly became a vital reference point for the pricing of financial instruments.
Banks estimate what they would have to pay if they asked other banks to lend to them, and submit these guesses to the BBA. The rate is calculated daily, and once all the estimates are in, the extreme values are thrown out and the remainder averaged – this becomes LIBOR