LIBOR: the world's most important number

LIBOR – the London Interbank Offered Rate - directly affects the cost of borrowing, from company loans to mortgages and overdrafts. Yet surprisingly few investors know what it is...

"The British Bankers Association's London Interbank Offered Rate matters more than any other set of numbers in the world," says Donald MacKenzie in the London Review of Books. That's because it directly affects the cost of vast quantities of borrowing, from company loans to mortgages and overdrafts. Yet surprisingly few investors know what it is.

Take two banks. Bank A receives £70m of deposits but wants to lend out £100m to earn a higher rate of interest. That leaves it £30m "short". So Bank A calls Bank B, which offers to lend £30m at Bank B's "offered rate". This will vary the three-month rate will not the same as the six-month rate, for example. There may also be a better set of rates available from banks C, D, E and so on, with Bank A free to choose the most competitive.

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