LIBOR, or the London Interbank Offered Rate, serves as a benchmark that sets daily interest rates on loans and financial instruments globally. It is the reference interest rate calculated each day at which banks worldwide lend to one another.

Additionally, LIBOR acts as a standard measure of market expectations for interest rates determined by central banks. It reflects the liquidity premiums for various instruments traded in the money markets and serves as an indicator of the overall health of the banking system.

To compute LIBOR daily, the Intercontinental Exchange (ICE) requests banks around the globe to provide the rates at which they would extend short-term loans to each other. ICE discards the highest and lowest rates, then calculates the average from the remaining figures. The outcome is the daily LIBOR rate.

LIBOR is calculated in five different currencies:

• U.S. dollar
• Euro
• British pound
• Japanese yen
• Swiss franc

Each currency has seven different loan durations:

• Overnight/spot next
• One week
• One month
• Two months
• Three months
• Six months
• Twelve months

The combination of five currencies and seven maturities results in a total of 35 distinct LIBOR rates calculated and reported each business day. The most frequently cited rate is the three-month U.S. dollar rate, commonly referred to as the current LIBOR rate.

Financial institutions worldwide utilize LIBOR as the foundation for determining their own interest rates on loans, mortgages, credit cards, and financial derivative pricing. Consequently, LIBOR also affects consumers, not just financial entities.

While LIBOR is recognized globally, other domestic and regional financial centers have developed their own interbank offered rates for local loans and financial instruments. For instance, Europe has the European Interbank Offered Rate (EURIBOR), Japan has the Tokyo Interbank Offered Rate (TIBOR), China has the Shanghai Interbank Offered Rate (SHIBOR), and India has the Mumbai Interbank Offered Rate (MIBOR).

LIBOR plays a vital role in global financial markets as it helps determine borrowing costs for various financial products and transactions. However, in recent years, LIBOR has faced several controversies, including a rate-rigging scandal, prompting calls for its replacement with alternative benchmark rates.

As a result, several jurisdictions have introduced new reference rates to supplant LIBOR. For example, the United States has implemented the Secured Overnight Financing Rate (SOFR) as an alternative benchmark, while the United Kingdom has introduced the Sterling Overnight Index Average (SONIA).