What does a lower LIBOR mean in these times of crisis?

LIBOR- London Interbank Offered Rate is the rate at which banks borrow unsecured funds from each other. It is comparable to the US Federal Funds Rate. LIBOR is used as a reference rate for a lot of the money market instruments such as futures contracts, variable rate mortgages, currencies and interest rate swaps to name a few.

With the economy in recession and facing one of the worst times in history, what role does LIBOR play?

In the first quarter LIBOR has gone down drastically. It just shows that the economy has started to make progress in terms of coming out of recession. The lower the LIBOR the more money available to borrow. The rates that are offered for mortgage are usually represented as a percentage over LIBOR and that rate is usually based on credit history. The difference between LIBOR and the actual provided rate is the profit that the lending bank makes.

But, banks are more careful now than ever before before lending out any money. One of the reasons why we are facing these times of crisis is because banks borrowed way too much and then further lent money to people who were unable to pay back, an example – subprime mortgages.

In all , a lower LIBOR is showing positive signs toward economic recovery, hopefully that time comes soon!

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