How LIBOR benchmark is calculated?

LIBOR is the acronym for London Interbank Offered Rate. The ‘LIBOR’ serves as the key benchmark rate in calculating interest rates on various loans across the world.

Each morning before 11 a.m. (GMT), the sets of major banks that have a significant presence in the London market are asked the rate at which they could borrow funds from other banks. The bank which needs funds (of marketable size) will quote the rate for which it is ready to borrow. The rates quoted are normally for 15 different maturities (due dates) on 10 major currencies. The bid rate how much interest they would pay to borrow money on a short-term basis (ranging from overnight to one year) from other institutions is known as LIBID (London Interbank Bid Rate). Although the process is still supervised by the British Bankers’ Association, the calculations are now performed by Thomson Reuters a multinational mass media and information firm. Thomson Reuters discards the four highest and four lowest submissions as outliers and averages the remaining ones. Thus, Libor is the average interest rate at which banks can borrow from each other.  Libor interest rates are used by banks around the world for fixing interest rates on various loans and advances, by adding a spread to LIBOR. The spread is an additional percentage of interest that reflects the risk of lending to a particular borrower. Often the rates are adjusted by banks annually or quarterly, rather than every day. In India, FEDAI would quote/display the LIBOR / Swap rates which will be used by banks in arriving at the interest rates on NRI deposits (NRE/FCNR).

Related article: What is MIBOR?