LONDON–After more than 40 years, today officially marks the end for Libor, the London Interbank Offered Rate, which served as the key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages and corporate debt around the world.
Effective in January 2022, Libor was no longer used to issue new loans in the U.S. and was replaced by the Secured Overnight Financing Rate (SOFR), which many experts consider a more accurate and more secure pricing benchmark.
The decision to make the move to Libor followed a decade of scandals and crises that undermined confidence in its reliability as a foundation for pricing.
For those who never worked under the Libor standard or who just want a nostalgic reminder, Libor provided loan issuers with a benchmark for setting interest rates on different financial products. It was set each day by collecting estimates from up to 18 global banks on the interest rates they would charge for different loan maturities, given their outlook on local economic conditions. Libor was calculated in five currencies: UK Pound Sterling, the Swiss Franc, the Euro, Japanese Yen and the U.S. dollar.
How Libor Was Used
The London Interbank Offered Rate was used to price adjustable-rate mortgages, asset-backed securities, municipal bonds, credit default swaps, private student loans and other types of debt. Institutions would add their own margin over Libor in pricing their loans.
As of late 2019, for example, some $1.2 trillion worth of residential mortgage loans and $1.3 trillion of consumer loans had been priced using Libor.
Due to12-month maturities, Libor remained in effect through June 30.
The End of Libor
The end of Libor began in the summer of 2017 with the U.K.’s Financial Conduct Authority’s decision to wind down the standard following a number of scandals many years earlier, including a broad scheme in which bankers at several major financial institutions colluded with each other to manipulate Libor.
Many leading financial institutions were implicated in the scandal, including Deutsche Bank, Barclays, Citigroup, JPMorgan Chase and the Royal Bank of Scotland.
As a result of the rate-fixing scandal, questions around LIBOR's validity as a credible benchmark rate has arisen and it is now being phased out.
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