The London Interbank Offered Rate, better known as Libor, is a benchmark interest rate that plays a critical role in financial markets across the globe. Libor influences trillions of dollars worth of financial products and contracts, from mortgages and student loans to derivatives and bonds. This comprehensive guide will provide an in-depth look at what Libor is, how it works, its history and controversies, and its future.

What is Libor?

Libor is an acronym for London Interbank Offered Rate. It is defined as:

The rate of interest at which banks offer to lend funds to one another in the international interbank market for short-term loans.

In simple terms, Libor is the interest rate banks charge when lending to each other. It is a benchmark rate that reflects how much it costs for banks to borrow from one another.

Libor is administered by the ICE Benchmark Administration (IBA) and comes in 7 maturities ranging from overnight to 12 months. The most widely quoted Libor rates are the 3-month and 6-month.

There are 5 major currencies with their own Libor rates – Pound Sterling (GBP), Euro (EUR), Japanese Yen (JPY), Swiss Franc (CHF), and US Dollar (USD). The US Dollar Libor is the most widely referenced.

Libor rates are calculated each business day based on submissions from a panel of large, global banks that engage in interbank lending. The submitted rates reflect how much interest they would expect to pay to borrow from other banks.

After discarding the top and bottom quartiles, the remaining submissions are averaged to determine that day’s Libor fix for each maturity and currency.

Why Libor Matters

Although Libor seems like an obscure interbank rate, it has an enormous influence in the global financial system for several reasons:

Libor is embedded in trillions worth of financial contracts – From relatively simple adjustable rate mortgages to complex derivatives and futures, Libor serves as a reference rate for determining interest payments and settlement amounts. Over $350 trillion worth of financial products reference Libor globally.

It serves as a benchmark for other interest rates – Many floating rate financial instruments are pegged to Libor like prime rates or Treasury bill rates. Changes in Libor affect the rates consumers and institutions pay.

It provides insight into bank health – Since Libor reflects the rates banks pay to borrow from each other, it provides a window into credit risk and liquidity in the banking system. Spikes in Libor can signal stressed market conditions.

In essence, Libor provides a benchmark indicator of borrowing costs between banks and the overall credit environment. Its ubiquitous nature across global finance means even small changes can have enormous impacts.

A Brief History of Libor

Libor has origins dating back to the 1960s, but became more formalized in the mid-1980s as derivatives markets grew. Here are some key events in the history of this essential benchmark:

1984 – Banks in London form BBA Libor as an interbank lending rate overseen by the British Bankers Association.

1986 – First Libor rates published for US Dollar, Pound Sterling and Japanese Yen on January 15, 1986. The process remains informal.

1998 – Libor administration is expanded to additional currencies and maturities. The benchmark grows in use.

2005 – Libor becomes the reference rate for interest rate swaps as that market rapidly grows leading up to the 2008 crisis.

2008 – Libor spikes during the global financial crisis adding stress. Concerns emerge regarding rate manipulation.

2012 – Investigations reveal abuse of Libor during crisis by rate submitters at several global banks. Fines levied.

2013 – Administration of Libor switched from BBA to NYSE Euronext, part of Intercontinental Exchange (ICE)

2021 – Regulators announce plans to phase out Libor, replacing it with new benchmark rates.

This timeline illustrates Libor’s evolution from an obscure interbank rate to the world’s most dominant benchmark underpinning global finance. But it would also face scandals and reformation.

Libor Scandal and Manipulation

In 2012, a major scandal erupted when it was revealed that some of the banks responsible for submitting rates were manipulating Libor. Lax oversight allowed banks to submit false rates that benefited their trading positions.

Traders at banks like Barclays, UBS, and Deutsche Bank were found guilty of colluding to nudge Libor up or down on certain days to profit on interest rate derivatives they held.

Emails between traders revealed manipulation to benefit trading profits rather than reflecting true borrowing costs. This undermined the integrity of this key benchmark. Investigations resulted in billions in fines levied on the guilty banks.

The Libor scandal shook confidence in financial benchmarks and interbank lending markets. It illustrated the systemic risks of an opaque and self-reported rate open to exploitation. Questions emerged regarding how Libor should be reformed or replaced.

Libor Phase Out and Transition

In response to the loss of confidence in Libor, regulators in the UK, Europe, Japan, Switzerland and the US moved forward with plans to phase it out entirely by mid-2023.

Each jurisdiction developed new “risk-free” reference rates (RFRs) to replace Libor based on actual overnight lending rates rather than bank submissions. The replacements have some key differences:

Based on real transactions – RFRs use volumes of overnight interbank loans or repo markets to anchor rates to real activity rather than estimates.

Backward-looking – RFRs are based on past overnight borrowing rates over a period of time rather than forward expectations.

Nearly risk-free – The rates reflect actual transactions in highly liquid, near risk-free markets.

The Federal Reserve’s preferred Libor replacement rate is the Secured Overnight Financing Rate (SOFR) which launched in 2018. SOFR is based on hundreds of billions in daily overnight Treasury repo transactions.

The transition is well underway with SOFR increasingly adopted in new loans and derivatives. However, the sheer scope of existing Libor financial contracts poses an enormous challenge. Amendments to everything from business loans to mortgages will be required industrywide. Expect Libor to continue fading from use over the next year until its planned demise.

How Libor is Calculated Daily

Libor rates are calculated and published each business day by the ICE Benchmark Administration (IBA) using a standard process:

1. Banks submit rates – A panel of large banks with international operations and expertise in interbank lending submit the rates at which they could borrow reasonable market size funds in a specific currency and maturity from other banks.

2. Top and bottom quartiles discarded – The highest 25% and lowest 25% of submissions are excluded to eliminate outliers and reduce manipulation incentives.

3. Rates averaged – The remaining submissions are averaged and rounded to 5 decimal places to derive the final benchmark rate for each currency and maturity.

4. Rates published – The final Libor fixings are published on global financial data screens around 11:55 am London time each day.

5. Fixings applied – The published rates are then used to calculate interest obligations on mortgages, student loans, bonds, swaps, and other financial products.

This relatively transparent calculation methodology helped Libor gain dominance as banks accepted it as an industry standard. But it was also vulnerable to exploitation as seen in the rate-rigging scandals. The move to new benchmarks addresses these weaknesses.

Uses of Libor Across Financial Markets

Since its creation in the 1980s, use of Libor grew exponentially to span financial contracts and products across multiple sectors:


  • Adjustable rate mortgages
  • Credit cards
  • Floating rate business loans

Public Finance

  • Municipal bonds
  • Floating rate notes
  • Asset-backed securities

Investment Markets

  • Futures contracts
  • Interest rate swaps
  • Forward rate agreements

Across these markets, Libor serves as the reference point off which variable interest payments are calculated. As Libor moves up or down, so does the interest owed on this huge mass of financial instruments.

Certain products like interest rate swaps and Eurodollar futures contracts now dwarf the underlying interbank lending market Libor was meant to represent. The tail began wagging the dog given Libor’s vast embedding in global finance.

Criticisms and Weaknesses of Libor

Beyond the manipulation scandals, Libor has drawn criticism over the years for other shortcomings:

  • Submissions are hypothetical – Banks submit rates based on perceived borrowing costs, not actual transactions. This makes it vulnerable to speculation and distortion.
  • Inaccurate in times of stress – As seen in 2008, Libor can become detached from risk and liquidity in interbank lending during periods of market turmoil.
  • Not enough submissions – In smaller or less active currencies, rates are set on too few bank submissions leading to volatility and skews.
  • Incentives to distort – Banks have at times skewed submissions to portray stronger credit profiles than reality.
  • Lack of oversight – Regulatory oversight and transparency was lacking during Libor’s freeform early days. Manipulation went undetected.
  • Too many maturities – Maintaining Libor rates across 7 different maturities creates an administrative burden. The long durations lack liquidity.
  • Doesn’t reflect modern markets – Interbank unsecured lending now makes up a small portion of overall funding vs repo or derivatives markets.

These flaws ultimately necessitated Libor’s reform and replacement despite its deep entrenchment in global finance. Markets required reference rates grounded in real transactions and solid regulation – which the new risk-free rates aim to deliver.

Impact of Libor Rate Changes

Because Libor is embedded throughout financial markets, changes in the benchmark rate can have widespread economic impacts:

  • Adjustable rate mortgages shift up or down, affecting household budgets and spending power.
  • Credit card and small business lending rates rise or fall in sync, influencing borrowing and investment.
  • Corporate bonds and municipal finance costs increase or decrease, filtering into business and local government budgets.
  • Profitability of interest rate swaps shifts, impacting institutional investors and speculators.
  • Interest costs paid by banks climb or drop, swaying net interest margins.
  • Currency and futures traders alter positions and hedges in response to Libor swings.

In effect, Libor acts as a fulcrum upon which trillions in variable global financing costs pivot. Even small moves of a few basis points can ripple into billions in dollars of costs over time. This makes tracking its changes an essential activity for corporations, policymakers, and investors alike.

Future Path for Libor

Libor stands at a crossroads as we move through 2023. Some of the key events that will shape its future:

  • Continued transition of new contracts over to SOFR and other alternative benchmarks accelerating through 2023.
  • Amendments and renegotiations of legacy Libor contracts to new rates picking up pace before Libor cessation.
  • Legal clarification for fallbacks to enable smooth transition for remaining products using Libor.
  • Banks maintaining submissions until end-2023 for most currencies and maturities.
  • UK regulator pushing to move adoption of Sonia in place of sterling Libor.
  • Analysis of risks and market readiness as Libor approaches its demise.
  • Lawsuits and contract frustrations appearing over legacy use beyond 2023.
  • Final fixings published and Libor discontinued across panels during 2023.

While Libor has been deeply embedded in finance, markets continue working towards its replacement. The multi-year transition marks a monumental undertaking to transfer trillions in instruments to new risk-free rates.


Libor emerged from humble beginnings in London interbank lending to become the predominant benchmark underpinning global finance. But scandals and shortcomings necessitated its replacement with new risk-free reference rates built on real market activity. The complex transition process continues unfolding across jurisdictions and markets.

Time will tell if SOFR and other alternatives can truly fill Libor’s enormous shoes. But as the sun finally sets on this stalwart benchmark, it marks the dawn of a new era in global finance. One with stronger regulatory oversight and market grounding to avoid risks that lurk when benchmarks become detached from reality.

In financial markets, even the most dominant indices are not immune to evolution. As economic cycles turn and technology progresses, change is the only constant.