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Current time:0:00Total duration:3:37

Video transcript

you might have heard the term LIBOR when people are quoting interest rates or they're saying hey I'm going to lend you money a few percentage points above LIBOR you'll hear LIBOR quoted on on some of the financial news channels and what it is is just an average of the interest rates that banks are lending to each other and it's calculated by the British Bankers Association it's actually calculated by Thomson Reuters for the British Bankers Association but it's there to kind of provide a benchmark for other types of securities and financial transactions and it literally stands for the London interbank offer rate so it's the in London it's the it's the rate the offer rate between banks it's the London interbank offer rate and to understand that a little bit better we I've set up two banks over here at Bank a and Bank B and you might already know that when you go and deposit your money in banks the bank won't leave all that money around the way it makes money as it lends a good bit of that money to to other people as as loans and it will keep just enough cash on hand that it thinks well you know if people actually were to come and ask for their money from their checking account we have enough on hand but you could imagine every now and then a bank might get low on cash or it might get close to kind of the reserve requirements that the central bank in that country requires a bank to have on hand so in that those situations say Bank a is getting to that that situation it says let me go borrow some money let me go borrow money from an int from another bank so this is interbank borrowing bank B over here they're flush with cash and they say well we don't like to keep so much cash around we want to lend it so we can actually get interest we get no interest on cash so maybe Bank B lends money to bank a so maybe they lend this much cash so that's the new cash that Bank a got right over there the new cash and of course it is a loan so this is a new loan to offset it remember assets are equal to liabilities plus equity so now the liabilities is this whole thing over here so this is loan from from B for the cash so that they have a little bit better of a cushion and now be their loans have increased and their cash has decreased so this is a loan loan to a right now they took this cash and they gave it to Bank a and that rate that they lent it at maybe it was at 1% maybe it's a 1 percent annual rate and of course this will be renewed every day so it's an overnight rate this rate is an interbank rate so what they do in its on behalf of the British Bankers Association as they go survey a bunch of banks in London 8 12 16 banks in London and say hey what was the rate at which y'all transacted and then they will quote that and they'll quote that as the overnight LIBOR so they'll quote it at say hey maybe it was 1.2 percent across all of the banks that we surveyed and what's interesting about the LIBOR is it's done in ten currencies it's not just in in the sterling or the dollar or the yen it's in ten currencies and that's what really differentiates it well amongst other things but what really differentiates it from the from the effective federal funds rate which is another interbank borrowing rate but that's in the United States and that's more revolving around policy concerns because the federal the federal bank actually tries to change it