Which rate is significant for banks when determining short-term loan costs?

LIBOR, or the London Interbank Offered Rate, is a significant rate for banks when determining short-term loan costs because it serves as a benchmark for interest rates on various financial instruments. Specifically, it reflects the average interest rate at which major global banks lend to one another in the short-term interbank market. Because many loans, including mortgages and corporate loans, are tied to LIBOR, fluctuations in this rate directly impact the borrowing costs for various financial products.

Although SOFR, EURIBOR, and the Prime Rate are also important rates, LIBOR has historically been more prominent in global finance as a benchmark for short-term interest rates.

SOFR, or the Secured Overnight Financing Rate, is increasingly used as an alternative to LIBOR, especially following reforms and the phase-out of LIBOR. However, as of now, LIBOR remains crucial for many existing financial agreements and serves as a reference in various markets.

EURIBOR is primarily relevant for loans in Europe, making it less significant for banks operating outside that jurisdiction. The Prime Rate is typically used for U.S. consumer loans and does not have the same breadth of application in international markets as LIBOR does.