1-month LIBOR

Definition

1-month LIBOR, or the London Interbank Offered Rate, is the average interest rate at which major global banks lend to one another for a term of one month. This benchmark rate serves as a critical indicator of the health of the banking system and is widely used in financial contracts, derivatives, and loans to determine borrowing costs.

5 Must Know Facts For Your Next Test

1. 1-month LIBOR is published daily by the Intercontinental Exchange (ICE) based on submissions from leading banks in London.
2. It is commonly used as a reference rate for floating-rate loans, bonds, and derivatives, impacting the cost of borrowing across various sectors.
3. Changes in the 1-month LIBOR can reflect shifts in market conditions, such as liquidity and credit risk perceptions among banks.
4. The transition away from LIBOR has been driven by concerns over its manipulation and has led to alternative rates like SOFR gaining prominence.
5. 1-month LIBOR is typically higher than the overnight lending rates due to its longer duration, reflecting the additional risk associated with lending over a month.

Review Questions

• How does 1-month LIBOR influence borrowing costs for businesses and consumers?
  • 1-month LIBOR serves as a crucial benchmark for determining interest rates on a variety of financial products, including variable-rate loans and mortgages. When 1-month LIBOR increases, it typically leads to higher borrowing costs for businesses and consumers, as lenders adjust their rates based on this benchmark. Conversely, when 1-month LIBOR decreases, borrowers may benefit from lower interest expenses. This relationship highlights how fluctuations in LIBOR can significantly impact overall economic activity by influencing consumer spending and business investment.
• Discuss the implications of transitioning from LIBOR to alternative rates like SOFR on financial markets.
  • The shift from LIBOR to alternative rates like SOFR is significant because it represents a move towards more reliable and transparent benchmarks. Unlike LIBOR, which was subject to manipulation scandals, SOFR is based on actual transactions in the Treasury repurchase agreement market. This transition impacts financial markets by requiring adjustments in pricing models, risk assessments, and contractual terms for existing products tied to LIBOR. Market participants must navigate these changes carefully to mitigate risks associated with this shift while ensuring liquidity and stability in their financial operations.
• Evaluate how the use of 1-month LIBOR affects regulatory policies in banking and finance.
  • The reliance on 1-month LIBOR has prompted regulatory bodies to establish stricter oversight and guidelines aimed at enhancing transparency and integrity in benchmark rates. Regulators have focused on ensuring that rates like LIBOR are not subject to manipulation and reflect actual market conditions. This evaluation led to increased scrutiny of banks' reporting practices and encouraged efforts to develop alternative benchmarks that could serve as more stable references. As regulations evolve in response to past challenges, understanding the implications of using 1-month LIBOR becomes essential for both compliance and effective risk management within financial institutions.

Related terms

LIBOR: The London Interbank Offered Rate is the interest rate at which banks offer to lend unsecured funds to other banks in the international money market.

SOFR: The Secured Overnight Financing Rate is a benchmark interest rate for dollar-denominated derivatives and loans that reflects the cost of borrowing cash overnight collateralized by Treasury securities.

Euribor: The Euro Interbank Offered Rate is the average interest rate at which Eurozone banks lend to each other, similar to LIBOR but specifically for the euro currency.