Euro-LIBOR (London Interbank Offer Rate) is the euro interest rate used by banks. Banks have to lend money to each other. You run this on the London Interbank market through. The LIBOR defines the interest rate at which the money is borrowed.
Since the cost of money for banks is related to the LIBOR, European banks often associate the Euro LIBOR with the interest rate on loans for companies and individuals. An exemplary interest rate can be LIBOR + 1 percentage point. This means that the bank margin for this loan is 1%. The rest is a cost of money in the interbank credit market.
History of the Euro-LIBOR
The origins of LIBOR go back to 1969. The person who implemented LIBOR is Minos Zombanakis (Greek banker). In the mid-1980s, the banks began lending based on LIBOR. In 1986 the British Bankers Association (BBA) took control of the interest rate and formalized the governance process and data collection.
In 1984 the BBA initiated the standardization of the contractual conditions for interest rate swaps. Two years later, the BBA introduced Libor as the benchmark interest rate for a range of securities, notably syndicated loans, futures and forward rate agreements. Today, Libor serves as the benchmark rate for unsecured loans between London banks as well as many financial instruments traded around the world.
The Libor in detail
LIBOR interest rates are calculated daily and published at 11:30 am GMT. It contains five currencies (euro, British pound, US dollar, Swiss franc and Japanese yen) and seven loan terms that start from overnight to a year. The rates are a benchmark - not the mandatory interest rate. The trading rate depends on the banks that are participants in the trade, their status, the amount borrowed, the period, etc.
There is a similar interest rate in the US: Federal Funds Rate. It is a "short-term money market rate" set by the Federal Open Market Committee (FOMC). In 2007, when the financial crisis began, the FOMC reduced the federal monetary rate target to near zero. It then began to use less traditional approaches to policy implementation, including buying very large quantities of longer-term government securities to put downward pressure on longer-term interest rates.