The world’s large banks are constantly lending each other money in a wide variety of currencies. For example, a large bank, like HSBC, might need 100 million Euro on a particular day. HSBC will borrow that money, through an inter-bank loan, at an agreed upon interest rate.
Interbank loans are usually for large sums of money, and are for very short periods of time between 3 and 12 months. The interest rate that is used for these loans is called the LIBOR – London Interbank Offered Rate.
The British Banking Union sets the LIBOR everyday according to supply and demeand for inter-bank loans.
The banking union sets a different LIBOR rate for each of nine different currencies, and for 3, 6, 9, and 12 month loans.
The LIBOR rate is used worldwide as a base rate for private loans. Often, loans are given at the LIBOR rate plus or minus some percent. For example: LIBOR + 2% or LIBOR + 1.5%.