London Interbank Offered Rate
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 at which major global banks lent to one another on a short-term basis. It was used to determine the cost of interbank borrowing and was widely applied in various financial products and contracts. LIBOR had multiple tenors, including overnight, one week, one month, three months, six months, and one year.
Origin: LIBOR was first introduced in 1986 to provide a standardized benchmark rate for short-term interbank lending. It was initially established by the British Bankers' Association (BBA) and later taken over by the Intercontinental Exchange (ICE), which calculated and published it daily. LIBOR quickly became a key benchmark in global financial markets during the 1980s and 1990s.
Categories and Characteristics: LIBOR had multiple tenors and currency versions, including USD, EUR, GBP, JPY, and CHF. Each currency's LIBOR rate was determined by a panel of designated banks that provided quotes reflecting their borrowing costs under unsecured conditions. The main characteristics of LIBOR included its wide application range and authoritative status as a financial market benchmark. However, LIBOR also had drawbacks, such as susceptibility to manipulation and market volatility.
Specific Cases: 1. In the mortgage market, many adjustable-rate mortgages (ARMs) used LIBOR as a benchmark rate, with borrowers' interest rates adjusting based on changes in LIBOR. 2. In the derivatives market, LIBOR was widely used in interest rate swaps and options contracts, helping businesses and investors manage interest rate risk.
Common Questions: 1. Why was LIBOR phased out? Due to scandals and questions about its effectiveness as a benchmark rate, regulators decided to phase out LIBOR. 2. What replaced LIBOR? LIBOR was primarily replaced by the Secured Overnight Financing Rate (SOFR), which is considered more transparent and reliable.
