What is the London interbank offered rate?

Until the onset of the credit crunch two years ago, only committed City-watchers would have been interested in Libor – the rate at which banks lend to each other. The London interbank offered rate is the main interest rate in the London wholesale money market for pounds, dollars and euros. Unlike bank rate, which is set by the Bank of England, Libor is set by the demand and supply of money as banks lend to each other to balance their books on a daily basis. Libor became notorious in the financial crisis as bankers tried to illustrate that the financial markets had seized up and explain why interest rates were being raised on loans to customers as official rates were falling.

The rate is compiled by the British Bankers' Association once a day. The most-closely watched rate is three-month sterling Libor and is based on submissions by a panel of 16 major players. The BBA ranks them, removes the top and bottom quartiles, and publishes the average.