The rate that sets the lending standard
The London interbank offered rate, or Libor, touches many aspects of people’s lives, from their investments to home mortgages.
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George Chen
05 July 2012
The London interbank offered rate, or Libor, touches many aspects of people’s lives, from their investments to home mortgages.
But few outside financial institutions actually know what it is.
In short, Libor means an interest rate that banks take as a reference when they borrow large amounts of money from each other in London’s interbank market, where a number of qualified financial institutions can take part. Libor is fixed on a daily basis by the British Bankers’ Association, which initiated this type of reference rate in the early 1980s.
Now, Libor is considered the world’s most widely used benchmark for interest rates for short-term lending, from overnight to up to one year.
Many financial institutions set their own rates for clients based on Libor when they offer a wide range of lending services such as mortgages and credit cards.
Many big companies often negotiate with banks for loans that are based on Libor. Libor is not confined to dealings within Britain.
It is a widely accepted reference rate in the United States, Canada and Switzerland. Other countries also monitor Libor closely to fix their local interbank lending rates.
In Hong Kong, a similar rate scheme is called the Hong Kong interbank offered rate, or Hibor for short, and that has become a popular option among local homebuyers when they negotiate mortgages from banks.