The British Banking Association developed the London InterBank Offered Rate, or LIBOR, to standardize the daily interest rate banks charge each other on loans, according to About.com. It first published the LIBOR in January 1986, with interest rates for interbank loans made in U.S. dollars, Japanese yen and British sterling.Continue Reading
The number of interbank loans used to back options purchases increased in the early 1980s, and the British Banking Association, or BBA, began releasing the daily LIBOR to make it easier to negotiate loan contracts based on standardized interest rates, according to About.com. The daily LIBOR is established by asking banks what interest rate they would be willing to pay on a loan from another bank, during a normal market period, prior to 11 a.m. In 2013, the administration of the LIBOR was transferred away from the BBA following an investigation into allegations that banks were falsifying data to gain more favorable interest rates, according to the Associated Press.
The daily LIBOR has closely mirrored the daily rate the federal government charge banks on loans to meet their reserves at the end of each day, other than a period between 2006 and 2009, when the LIBOR rose due to fear of banks heavily invested in subprime mortgages, states About.com. Banks were not willing to loan money to other banks that may not be able to pay back their loans or that used subprime mortgages as collateral, except at higher interest rates.Learn more about Financial Calculations