London Inter Bank Offered Rate

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The London Inter Bank Offered Rate, known fondly as “LIBOR” is — or until now has been — the basic rate of interest used in lending between banks on the London interbank market and also used as a reference for setting the interest rate on other loans.

Each day, the administrator would ask major global banks at what rate could they borrow from other banks for short-term loans, take out the highest and lowest figures and calculate a “trimmed average” from the remainder. Once the rates for each maturity and currency are calculated and finalized, they are announced/published once a day at around 11:55 am London time by the British Bankers’ Association who, it is fair to say, didn’t have a terribly good handle on what LIBOR was used for and how serious it might be if someone abused the privilege of helping to set it.

LIBOR was dull. It used to be so snoresville that literally no-one paid it any attention — not even the BBA who notionally calculated it — which meant it was ideal fodder for pernicious types who lurk in the undergarments of the financial services industry ripping everyone else off for their own personal gain. And so it proved. The LIBOR rates submitted by the banks weren’t firm prices, there was no real method to their calculation, and the temptation for certain traders to game their own option books proved great.

Suddenly, LIBOR became big news, Barclays lost much of its senior management, and the the world was turned on its head.

See also