The London Interbank Offered Rate is the average interest rate charged by leading banks in London when lending to other banks. It is a benchmark, along with the *Euribor for interest rates all around the world. This includes more than £300 trillion (NZ$600 trillion) of financial products such as credit cards, mortgages, financial derivatives like CDO’s etc. In the run-up to the financial crisis, traders are said to have attempted to have attempted to manipulate the rates to boost their bonuses or protect their jobs. At the peak of the financial crisis, they artificially lowered rates to hide the stress on the banks’ balance sheets.
Dan Davies described the LIBOR as similar to credit ratings – started as a market tool, then had a huge structure built on it, & never grew regulatory structure. However it is ironic that without the LIBOR scandel the borrowing public would have had to pay higher interest on loans. But the lower interest rates increased the amount of borrowing which increased house prices and started a speculative bubble. The cartoon is by Pugh of The Times in London.
* rate at which Eurozone Banks offer to lend unsecured funds to other banks in the euro wholesale money market.