The British Bank Assoc's LIBOR

The London Interbank Offer Rate (LIBOR) is managed by England's 'unregulated' British Bankers' Association and fluctuates daily based on the "interest rates at which 16 member banks offer to lend UNSECURED FUNDS (lending without collateral) to other banks in the London wholesale money market (or interbank market)".

Many investors worldwide refer to LIBOR as a gauge for the overall health of the WORLD's financial system.

More importantly, Commercial banks use LIBOR to price $60 TRILLION worth of Derivatives ! These derivatives include approx 6 million U.S. homeowner loans made via adjustable rate mortgages (ARM's) pegged to the 6 month LIBOR. According to Bloomberg, a total of about $360 TRILLION of financial contracts are priced using LIBOR.

Fluctuations in the LIBOR are caused by (but not limited to) changes related to the general availability + liquidity of credit between institutions.

Panics in the financial system (such as the U.S.'s subprime-induced housing DEbacle) can cause LIBOR to spike up and act INDEPENDENTLY of the interest rate set by the 'unregulated' U.S. Federal Reserve (the Fed Funds Rate).

The British Bank Association sets the LIBOR rate in 10 different currencies (including the U.S. dollar).

------------------------------------------------------------------------------

* Per Wiki on the ORIGINATION of LIBOR :

"During 1984 it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably Interest Rate Swaps, Foreign Currency Options and Forward Rate Agreements. Whilst recognizing that such instruments brought more business and greater depth to the London Interbank market, it was felt that future growth could be inhibited unless a measure of uniformity was introduced. In October 1984 the British Bankers' Association working with other parties such as the Bank of England established various working parties, which eventually culminated in the production of the BBAIRS terms - the BBA standard for Interest Swap rates Interest Settlement rates, the predecessor of terms became standard market practice.... Part of this standard included the fixing of BBABBA LIBOR. From 2 September 1985 the BBAIRSBBA LIBOR 'fixings' did not commence officially until January 1st, 1986."

-------------------------------------------------------------------------------

* Check out the interesting LIBOR PDF courtesy of the BBA explaining away some FAQ's:


http://www.bba.org.uk/content/1/c6/01/36/32/BBA_LIBOR_facts.pdf


Data Courtesy: CNBC, Wikipedia and the BBA