Which rate is commonly used as the interbank offered rate among major banks for short-term loans?

• A. Prime rate
• B. SOFR
• C. LIBOR
• D. Discount rate

Answer: (C)

Interbank funding benchmarks describe the rates banks use when lending to each other for short periods. Historically, the standard rate used for unsecured short-term lending among major banks has been LIBOR, the London Interbank Offered Rate. It reflects the average rate at which a panel of large banks said they could borrow from one another in the interbank market for different maturities, from overnight up to a year. Because so many financial products—floating-rate notes, loans, and derivatives—were tied to LIBOR, it became the global reference for short-term borrowing.

The other options aren’t the same kind of interbank reference. The prime rate is the rate banks charge their best-credit customers, not the rate banks lend to each other. SOFR, while now widely used, is a newer US benchmark based on secured Treasury repo transactions rather than the unsecured interbank market. The discount rate is the Fed’s rate for loans to banks through the discount window, not a market rate between banks.