The interbank rate is the interest rate at which banks loan to each other to meet short term liquidity needs.
This is an essential lending marketplace for lenders as they need to constantly meet requirements placed on them by regulators regarding their cash reserve ratio (reserve requirements).
This market place is also a huge reason why banks never seem to run out of funds to loan to borrowers. They can basically stock up on inventory here.
Also known as the interbank offered rate, is can also be referred to as the price wholesale foreign exchange transactions are conducted by banks in the forward and spot markets.
They are often named according to the country of origin.
Some of the most commonly referenced interbank rates are:
- London Interbank Offered Rate (LIBOR)
- Euro Interbank Offered Rate (EURIBOR)
- Tokyo Interbank Offered Rate (TIBOR)
Interbank rates are often used as a reference rate on consumer loans and credit facilities.
For example, a lot of mortgages, especially ARMs, have their interest rates structured with an index rate plus a spread.
For example, 3-Month LIBOR + 3%.
The “3-Month” indicated in the above example refers to the maturity. Such a home loan usually have an adjustment interval that runs parallel to the maturity period. (e.g. 3-Month LIBOR loan will have 3-Month adjustment intervals)
Different maturities generally have (but not exclusively) different rates.
And the shorter the maturity, the lower it generally tends to be.
As each interbank rate is regulated by the authorities governing that specific nation, the maturities available can vary from interbank rate to interbank rate.
LIBOR for example serves as much as 7 different maturities, and various different currencies.