What is the LIBOR rate that we have heard so much about during the credit crisis?
The London Inter-Bank Offer Rate (Libor) is the primary benchmark for interest rates around the world. It is basically the rate at which banks will lend to each other, and can be calculated over various timeframes (anything between one day and five years). It enables banks with liquidity requirements to borrow quickly from other banks, thus avoiding the need to hold excessive amounts of capital on their own balance sheets. The recent freezing of the credit market was a reflection of the fact that the banks had become unwilling to lend to each other, which in turn caused intervention by Central Banks around the world to inject some liquidity. Much more recently, the Libor rate has returned to levels previously seen before the US sub-prime fallout last summer.
