The Full Form of ‘LIBOR’ in Banking is ‘London Inter Bank Offered Rate’.
Full Form of LIBOR
LIBOR, which stands for London Inter Bank Offered Rate, is a benchmark interest rate used in banking and finance. It is the average interest rate at which banks can borrow funds from other banks in the London inter-bank market. LIBOR is set by the British Bankers Association (BBA) and published daily for five different currencies (U.S. dollar, euro, Japanese yen, pound sterling and Swiss franc) across seven different maturities (overnight, one week, one month, two months, three months, six months and twelve months).
LIBOR is widely used as a reference rate for various financial instruments such as derivatives contracts including futures and options exchanges; adjustable rate mortgages; corporate bonds; student loans; commercial paper; and bank deposits. The European Central Bank also uses LIBOR to set its own benchmark interest rates for Eurozone countries.
The use of LIBOR as a reference rate began in the 1980s when it replaced the International Monetary Market (IMM) index as the primary benchmark rate in international money markets. In 1986, BBA became responsible for setting LIBOR rates after an agreement with major international banks that operate in London’s inter-bank market.
BBA surveys around 20 of the largest UK-based banks every day to determine their daily Libor rates based on their borrowing costs within each currency/maturity combination. Every morning at 11:00 AM London time, BBA publishes these Libor rates on its website and other financial services websites such as Bloomberg.
Most banks use Libor to calculate their base interest rates when they are lending or borrowing money from each other or from private individuals or institutions outside of their own networks. For example, if a private individual wants to take out a loan from a bank that uses Libor to set its base rates, then that individual’s loan will be based on Libor plus any additional margin added by the bank itself. This means that changes in Libor can have an effect on how much people pay for loans and mortgages over time.
As well as being used by banks as an important reference rate for setting interest rates on loans and mortgages, LIBOR is also used by governments all over the world to set their own benchmark interest rates for government bonds and other securities issued by them through auctions. In addition to this, many institutional investors such as pension funds use LIBOR as a basis for calculating returns on investments over time.
Overall it’s clear that LIBOR plays an important role within global banking and finance systems due to its wide usage across many different markets and products around the world – making it one of the most important benchmarks within modern banking structures today.
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