LIBOR
What Is LIBOR?
LIBOR, or the London Interbank Offered Rate, was a global benchmark interest rate used by banks to determine borrowing costs between financial institutions. It served as a reference rate for many financial products, including loans, mortgages, derivatives, and corporate debt.
For decades, LIBOR was one of the most widely used interest rate benchmarks in global financial markets.
Why It Matters
LIBOR influenced interest rates on trillions of dollars in financial products worldwide. Many adjustable-rate loans, credit products, and financial contracts used LIBOR as the base rate to calculate interest charges.
Although LIBOR has largely been phased out, understanding it helps explain how many older financial contracts and loan agreements were structured.
How LIBOR Worked
LIBOR was calculated based on interest rate estimates submitted by major international banks. These rates represented the cost at which banks believed they could borrow funds from one another in the short-term lending market.
The rate was published daily for multiple currencies and loan durations.
Due to concerns about manipulation and transparency, global regulators began replacing LIBOR with alternative benchmark rates.
Example
An adjustable-rate loan might have been structured as “LIBOR + 2%.” If LIBOR was 3%, the borrower’s interest rate would be 5%.
LIBOR vs SOFR
- LIBOR was based on estimates from banks.
- SOFR (Secured Overnight Financing Rate) is based on actual transaction data in U.S. Treasury markets and has replaced LIBOR in many financial products.
FAQs About LIBOR
Is LIBOR still used today?
Many markets have transitioned away from LIBOR to new benchmark rates.
Why was LIBOR replaced?
Concerns about rate manipulation and the reliability of bank estimates led regulators to adopt new benchmarks.
What replaced LIBOR in the U.S.?
The Secured Overnight Financing Rate (SOFR) is commonly used as the replacement.
Related Terms
