[ by Larry Goldfarb ]

What it is Libor

The London interbank offered rate benchmark – Libor – is supposed to measure the interest rates at which banks borrow from each other. It is based on data reported daily by a 16-bank panel. Other interest rate indexes, like the Euribor (Euro interbank offered rate) and the Tibor (Tokyo interbank offered rate), function in a similar way.

Why It's Important

More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans, including auto and home loans, according to the CFTC. Even small movements – or inaccuracies – in the Libor affect investment returns and borrowing costs, for individuals, companies and professional investors.

How Libor Is Set

• By 11:10 a.m. London time, the banks on the Libor panels submit to Thomson Reuters, as an agent for the British Bankers' Association, their estimated borrowing rates.Thomson Reuters discards the highest and lowest submissions.
• The remaining 50% of the submitted quotes are averaged to work out the Libor rate.
• By about 11:30 a.m. London time, Libor rates are published.