London Interbank Offered Rate

London Interbank Offered Rate
Simdaperce · CC BY-SA 3.0 · source
Name	London Interbank Offered Rate
Abbreviation	LIBOR
Type	Interest rate benchmark
Administered by	Intercontinental Exchange Benchmark Administration
Introduced	1986
Currency	Multiple currencies
Tenor	Overnight to 12 months
Succeeded by	SONIA; other risk-free rates

London Interbank Offered Rate is a set of benchmark interest rates once widely used to price trillions of dollars of derivatives, mortgages, corporate loans, and securities across global financial markets. It served as a reference for contracts among banks and financial institutions in London, New York City, Tokyo, and other financial centers until reforms and legal actions led to replacement by alternative benchmarks. Major institutions, regulators, and market participants engaged in its administration, governance, and eventual transition.

Overview

LIBOR originated as a panel-based quoted rate reflecting unsecured borrowing costs among major money center banks such as Barclays, HSBC, Citigroup, JPMorgan Chase, and Deutsche Bank and was overseen by entities including the British Bankers' Association and later the ICE Benchmark Administration. It was produced for multiple currencies—United States dollar, British pound sterling, euro, Japanese yen, Swiss franc—and tenors from overnight to 12 months, influencing instruments issued by Fannie Mae, Freddie Mac, International Monetary Fund, and multinational corporations like General Electric and Toyota Motor Corporation.

Calculation and Methodology

LIBOR was calculated daily using submissions from a panel of contributor banks such as Bank of America, Credit Suisse, UBS, and BNP Paribas reporting the rates at which they believed they could borrow unsecured funds in wholesale markets. Administrators applied a trimmed mean algorithm—excluding the highest and lowest quartiles—similar to methods used by benchmarks like WM/Reuters and EURIBOR to publish reference rates each London business day. Oversight involved regulators such as the Financial Conduct Authority and central banks including the Bank of England, Federal Reserve System, European Central Bank, and Swiss National Bank, which monitored compliance with standards influenced by reports from Basel Committee on Banking Supervision and International Organization of Securities Commissions.

Historical Development and Key Events

Developed in the mid-1980s amid growth in Eurodollar markets and syndicate lending, LIBOR's prominence expanded through the 1990s with the rise of interest rate swaps administered by institutions like The Depository Trust & Clearing Corporation and International Swaps and Derivatives Association. Key events include the 2008 global financial crisis, which stressed interbank funding and prompted interventions by the Troubled Asset Relief Program, Bank of England, and Federal Reserve, and subsequent scrutiny of benchmark integrity. Reforms following investigative reporting by outlets such as the Wall Street Journal and inquiries by parliamentary bodies including the UK Parliament and agencies like the U.S. Department of Justice reshaped governance and led to new regulatory frameworks.

Manipulation Scandals and Legal Actions

From roughly 2005–2012, investigations revealed that traders at firms including Barclays, UBS, Royal Bank of Scotland, Rabobank, and Deutsche Bank had sometimes coordinated LIBOR submissions to benefit trading positions or to project financial strength, prompting fines by authorities such as the U.S. Commodity Futures Trading Commission, U.S. Securities and Exchange Commission, European Commission, and the Financial Conduct Authority. Criminal prosecutions, civil litigation, and class actions were brought in jurisdictions including United States District Court for the Southern District of New York and courts in the United Kingdom, resulting in multi-billion dollar settlements, reforms in compliance functions, and convictions of traders in cases handled by agencies like the Department of Justice (United States).

Economic Impact and Uses

LIBOR underpinned pricing for derivatives cleared through central counterparties such as LCH.Clearnet and ICE Clear Europe, guided adjustable-rate mortgages issued by lenders including Wells Fargo, Bank of America, and influenced corporate borrowing by conglomerates like General Electric and Siemens. Its movements affected monetary transmission alongside policy rates set by central banks including the Federal Reserve System and the Bank of England, and influenced sovereign financing in markets where entities such as United Kingdom Government and United States Treasury instruments interacted with bank funding conditions. Academic research by scholars affiliated with institutions like London School of Economics, Harvard University, and Princeton University analyzed LIBOR's role in systemic risk, market liquidity, and counterparty exposure.

Transition and Replacement (SONIA and Other Rates)

In response to scandal and shrinking unsecured interbank activity, regulators promoted transition to near risk-free rates: the Sterling Overnight Index Average (SONIA) replaced sterling LIBOR under programs run by the Bank of England and UK Financial Conduct Authority, while the Secured Overnight Financing Rate (SOFR) replaced USD LIBOR under guidance from the Federal Reserve Bank of New York and the Alternative Reference Rates Committee. Other rates adopted included Euro Short-Term Rate (€STR), Tokyo Overnight Average Rate (TONAR), and Swiss Average Rate Overnight (SARON). Transition efforts involved industry groups like ISDA, Loan Market Association, International Swaps and Derivatives Association, and central counterparties coordinating fallback language, contract amendments, and dissemination of historic rate series to mitigate legal and market risk.

Category:Financial benchmarks Category:Interest rates Category:Banking