What is London Interbank Offered Rate ?

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The London Interbank Offered Rate (LIBOR) was a benchmark interest rate for short-term loans between major global banks. It was phased out in 2023.From 1986 to the 2000s, LIBOR was a globally accepted key benchmark for the cost of borrowing between banks. The rate was calculated and published each day by the Intercontinental Exchange (ICE), but scandals and questions around its validity as a benchmark rate resulted in it being phased out.According to the Federal Reserve and regulators in the United Kingdom, LIBOR was phased out on June 30, 2023, and replaced by the Secured Overnight Financing Rate (SOFR). LIBOR one-week and two-month USD LIBORs stopped publishing as of Dec. 31, 2021, as part of the phaseout.1 Some USD rates are still published using a synthetic methodology, but these rates will cease in Sept. 2024.

Definition

The London Interbank Offered Rate (LIBOR) was a benchmark interest rate used globally for short-term loans between major banks. It was one of the most important rates in financial markets, widely used for pricing various financial products.

Origin

LIBOR was first introduced in 1986 and became a globally recognized benchmark for interbank borrowing costs. Calculated and published daily by the Intercontinental Exchange (ICE), LIBOR reached its peak influence in the 2000s. However, due to scandals and questions about its validity, LIBOR was phased out in 2023.

Categories and Features

LIBOR covered multiple currencies and different maturities, including one week, one month, three months, six months, and one year. Its main feature was reflecting the cost of short-term interbank borrowing, widely used in derivatives, loans, and bond markets. However, its calculation relied on banks' self-reporting, making it susceptible to manipulation.

Case Studies

Case Study 1: During the 2008 financial crisis, LIBOR was widely used to price mortgages and other financial products. The volatility of LIBOR during market turmoil had significant impacts on global financial markets. Case Study 2: In 2012, Barclays Bank was found to have manipulated LIBOR, leading to fines by regulators and widespread questioning of LIBOR's validity as a benchmark rate.

Common Issues

Investors may face issues such as adapting to the phase-out of LIBOR and the use of new benchmark rates like SOFR. A common misconception is that all financial products are immediately affected, whereas many contracts have transition periods.

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