The interest rate which banks charge on short-term loans with reasonable market size (usually in Eurodollars) offered to other banks. Banks tap the interbank market in order to secure sources of short-term funding and meet liquidity ratio requirements. Regulatory authorities (such as central banks and monetary authorities) impose liquidity requirements on banks in order to ensure they hold an adequate amount of liquid assets, such as cash, and therefore are able to meet any potential withdrawals from customers’ deposits and bank accounts. Banks which don’t have adequate liquidity to meet such withdrawals will need to borrow money, at the prevailing interbank rate, from other banks with excess liquid assets.

The interbank rate is typically influenced by a set of factors including the overall liquidity available in the market, the prevailing interest rates, the lifespan of a given loan, etc. The most widely used interbank rate is the LIBOR which is published daily based on the average rates on loans offered among London banks.