In the financial world this term LIBOR has made head lines. So I wanted to see whether I can make it simple for me and other simpletons.
Banks lend money to each other. Say for instance at the end of the day Bank A finds that more customers are withdrawn than deposits. So Bank A borrows money from a Bank B, who at the end of the day finds a surplus. There is an interest added for these transactions.
The average rate of interest paid by the banks in such interbank lending is called the London Interbank Offered Rate (Libor).
Way to calculate the Libor is very easy. In London 18 banks submit their interest rates to the British Banker's Association. The highest four and the lowest four are ignored and the average of the otherr eight is taken as the Libor. The same system exists in Europe called Euribor.
What the boffins say is that the health of the financial state of the country can be easily derived from this. Hmmmmmm......
Added on 05/07/12: After the credit crunch the major banks did not have any money to lend; and all the banks closed their doors for lending to others. We all knew about it back in 2008 or so. But the problem was that Libor was issued by the British Bankers Association and Euribor in Europe during that period upto now. You decide whether this is legal or not.
I am a selfish person.
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