Help! What is LIBOR?

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Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything"
In the past week, as governments in Europe rescued five banks and the U.S. debated a bailout, the cost of one-month bank loans in euros and overnight dollar loans soared to records. In practice, that means banks are hoarding cash, raising borrowing costs and slowing economies worldwide. Today's three-month Libor for loans in dollars jumped to 4.33 percent. Overnight dollar loans rose 168 percent on Sept. 30, to a record 6.8 percent from 2.6 percent. '

Libor is actually a set of rates, calculated for several currencies on periods ranging from overnight to 12 months. The British Bankers' Association compiles the dollar rate every day from data submitted by 16 banks, including Deutsche Bank AG and Royal Bank of Scotland Group Plc. There are also rates for the euro, Japanese yen, British pound, Swiss franc, and Australian and Canadian dollars.

Corporate bank loans are often linked to three-month Libor rates. Libor also affects interest costs on credit cards, student loans and adjustable-rate mortgages. From 2004 to 2006, more than half of the U.S. subprime mortgages at the root of the financial crisis, or those issued to the least creditworthy borrowers, had adjustable rates linked to Libor, said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland.

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