How Do I Explain a LIBOR Index?
Explaining the LIBOR index is not a difficult task. This index incorporates a number that changes frequently and can be derived only from complex calculations. However, it can be observed at any given time of day through various resources for free. The concept of the rate is fairly simple, and many investors and businesspeople consider it one of the most important figures that relates directly to an economy and financial markets.
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Instructions
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Explain what the acronym means. LIBOR stands for London Interbank Offered Rate.
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Explain what LIBOR means specifically. This is an interest rate that a group of London banks are willing to pay for deposits of U.S. currency, with a maturity rate that is determined beforehand. This may sound like a lot of jargon, so an explanation of the LIBOR's impact is important to include.
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Explain the LIBOR's significance to the economy and consumers. Through a series of complex calculations, this interest rate determines variable interest rates on loans, specifically loans between banks. Banks borrow money from each other all the time, daily. This rate has become so important that, although it specifically concerns London, banks all over the world use it as an index to set interest rates on loans.
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Discuss how the LIBOR's level affects the economy. If the LIBOR is high, banks will be less interested in lending to each other and borrowing, because of the interest rate that results. If the LIBOR is kept stable and low, liquidity in the banking sector is maintained.
Explain what this means to consumers. Specifically, if banks are getting a fair deal from each other and have a steady cash flow, they will give fair interest rates to their customers as well. And if customers can get fair interest rates from banks, they're more likely to borrow to buy homes, cars and other things, which keeps the economy running smoothly. The market crash of 2009 resulted when banks quit lending money to each other. As a result, they weren't willing to lend to consumers either, which led to the global recession in the first decade of the 21st century.
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