What is LIBOR?

Very few people understand how the modern banking system really works.

They have in their heads a model they learned from text books in which banks take deposits from customers, then lend out those deposits as loans. In reality, banks fund their loans by borrowing in the interbank market.

Once a bank has agreed to make a loan, it then borrows the same amount of money in the interbank market at a slightly lower rate. The lending comes first, the borrowing to fund the loan comes afterwards. This is why so many loans are pegged to LIBOR

(The London Interbank Offered Rate) Banks charge borrowers rates that are set to levels at some point above what the banks themselves pay to borrow.