The London Interbank Offered Rate (LIBOR) used to be the go-to interest rate for short-term loans among major banks worldwide, but it was officially retired in 2023.
From its inception in 1986 until the 2000s, LIBOR served as a widely recognized benchmark for borrowing costs between banks. The Intercontinental Exchange (ICE) calculated and released the rate daily, but various scandals and doubts about its reliability led to its eventual discontinuation.
As stated by the Federal Reserve and UK regulators, LIBOR was phased out on June 30, 2023, and was replaced by the Secured Overnight Financing Rate (SOFR). The one-week and two-month USD LIBOR rates stopped being published on December 31, 2021, as part of this transition.
While some USD rates are still available using a synthetic approach, these will be discontinued in September 2024.
Understanding about
LIBOR represented the average interest rate at which leading global banks lent to each other. It was calculated using five currencies: the U.S. dollar, euro, British pound, Japanese yen, and Swiss franc, and it covered seven different time frames: overnight/spot next, one week, and one, two, three, six, and 12 months.
Interbank lending forms the foundation for consumer loans worldwide, meaning it affects everyday people just as much as it does banks. The interest rates on various credit products, including credit cards, auto loans, and adjustable-rate mortgages (ARMs), vary according to the interbank rate. These fluctuations influence how easily banks and consumers can borrow from one another.
With five currencies and seven maturities, a total of 35 different LIBOR rates were calculated and reported each business day. The most frequently referenced rate was the three-month U.S. dollar LIBOR, often simply called the current LIBOR.
The ICE determined LIBOR by polling major global banks on the rates they would charge for short-term loans to other banks. They discarded the highest and lowest responses and then averaged the remaining figures, a method known as the trimmed average.
This rate was published every morning as the daily rate and was announced around 11:55 a.m. London time by the ICE Benchmark Administration (IBA).
History of LIBOR
As the market for interest rate-based products started to grow in the 1980s, it became essential to have a consistent measure of interest rates across financial institutions. In 1984, the British Bankers’ Association (BBA), which represented the banking and financial services sector, established the BBA interest-settlement rates.
This led to the creation of BBA LIBOR in 1986, which became the go-to standard interest rate for transactions involving interest rate and currency-based financial dealings between institutions, both locally and internationally.
Since then, LIBOR has seen numerous changes. A significant shift occurred in February 2014 when BBA LIBOR was rebranded as ICE LIBOR after the Intercontinental Exchange took over its administration.
The currencies used to calculate LIBOR have also evolved. While some new currency rates have been added, several have been removed or merged, especially with the introduction of euro rates. The financial crisis of 2007–2008 resulted in a notable reduction in the number of tenors for which LIBOR was calculated.
Conclusion
LIBOR, which stands for the London Interbank Offered Rate, used to be a key global benchmark for interest rates on short-term loans between banks. However, in 2012, it came under scrutiny when it was revealed that some bankers were tampering with the rates for personal gain. As a result, LIBOR is now almost completely being retired, with the final rates expected to stop being published by the end of 2024.