What is interbank lending?
Banks normally lend each other cash and short-term securities to help balance out their everyday activities. But lately, banks around the world have been extraordinarily cautious about this lending – partly because they are worried about getting repaid – and this is driving up the interest they have to pay when they want to borrow. This also makes the banks much more cautious about lending out the money they receive in deposits, thus making it harder – and more expensive – for homeowners, small businesses or corporations to borrow. The standard interest rate for interbank loans is Libor, an acronym for the London Interbank Offered Rate. Libor is an average of interbank rates offered by more than a dozen banks, and is calculated every day. The difference between Libor and government bond yields has been growing recently, and that’s important because corporate loans, mortgages and student loans are all based on Libor.
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