London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate (LIBOR) is an interbank money market rate. Up until 2021 when it was replaced by the SARON, it was the most important reference interest rate for Swiss financial products like money market mortgages.

The LIBOR is the average interest rate at which major banks lend out money to each other. The banks which participate in the LIBOR deliver their interest rates for unsecured money market loans to new agency Thomas Reuters every weekday at 11:00 London (western European) time.

The LIBOR is then calculated based on Thomas Reuters own criteria using the interest rates provided by 8, 12 or 16 banks. The participating banks are known as panel banks, and may vary depending on the currency in question. Because strict criteria are used for the selection of panel banks, it can be assumed that interest rates use are among the lowest interbank rates in London.

LIBOR calculations only account for the 50 percent of interest rates which fall into the mid-range. The highest 25 percent and lowest 25 percent of interest rates are not accounted for. The interest rates shared by the banks are the expected interest rates for the upcoming term at the time of sharing – and not necessarily the actual interest rates used.

The LIBOR can also be negative. This happens when the bank which lends out money to another bank pays interest to the bank which borrows money instead of vice versa.

The LIBOR is calculated in seven different variants based on different terms. These include 1 day (overnight), 1 week, 1 month, 2 months, 3 months, 6 months, and 12 months.

The 5 major currency money markets for which the LIBOR is calculated are the euro (EUR), the US dollar (USD), the Swiss franc (CHF), Japanese yen (JPY), and the British pound sterling (GBP).

The latest LIBOR is determined every weekday at 11:45 Western European time. As with Global Rates, the LIBOR rates are then publicly announced by the ICE Benchmark Administration (IBA) at a later time.

In the past, the LIBOR has been the subject of criticism and alleged manipulation. For this reason, it is no longer used in Switzerland, and has been replaced by the SARON.

More on this topic:
SARON mortgages explained
LIBOR mortgages explained