Libor

The London Inter-Bank Offered Rate was an interest rate average calculated from estimates submitted by the leading banks in London. Each bank estimated what it would be charged were it to borrow from other banks. It was the primary benchmark, along with the Euribor, for short-term interest rates around the world. Libor was phased out at the end of 2021, with market participants encouraged to transition to risk-free interest rates such as SOFR and SARON.
LIBOR was discontinued in the summer of 2023. The last rates were published on 30 June 2023 before 12:00 pm UK time. The 1 month, 3 month, 6 month, and 12 month Secured Overnight Financing Rate is its replacement. In July 2023, the International Organization of Securities Commissions said four unnamed dollar-denominated alternatives to LIBOR, known as "credit-sensitive rates", had "varying degrees of vulnerability" that might appear during times of market stress.
Libor rates were calculated for five currencies and seven borrowing periods, ranging from overnight to one year, and were published each business day by Thomson Reuters. Many financial institutions, mortgage lenders, and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products were tied to Libor.
In June 2012, multiple criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions, leading to the Libor scandal. The British Bankers' Association said on 25 September 2012 that it would transfer oversight of Libor to UK regulators, as proposed by Financial Services Authority managing director Martin Wheatley's independent review recommendations. Wheatley's review recommended that banks submitting rates to Libor must base them on actual inter-bank deposit market transactions and keep records of those transactions, that individual banks' Libor submissions be published after three months, and recommended criminal sanctions specifically for manipulation of benchmark interest rates. Financial institution customers may experience higher and more volatile borrowing and hedging costs after implementation of the recommended reforms. The UK government agreed to accept all of the Wheatley Review's recommendations and press for legislation implementing them.
Significant reforms, in line with the Wheatley Review, came into effect in 2013 and a new administrator took over in early 2014. The British government regulated Libor through criminal and regulatory laws passed by Parliament. In particular, the Financial Services Act 2012 brought Libor under UK regulatory oversight and created a criminal offence for knowingly or deliberately making false or misleading statements relating to benchmark-setting.

Introduction

The London Interbank Offered Rate came into widespread use in the 1970s as a reference interest rate for transactions in offshore Eurodollar markets.
In 1984, it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments, notably interest rate swaps, foreign currency options and forward rate agreements. While recognizing that such instruments brought more business and greater depth to the London Inter-bank market, bankers worried that future growth could be inhibited unless a measure of uniformity was introduced. In October 1984, the British Bankers' Association —working with other parties, such as the Bank of England—established various working parties, which eventually culminated in the production of the BBA standard for interest rate swaps, or "BBAIRS" terms. Part of this standard included the fixing of BBA interest-settlement rates, the predecessor of BBA Libor. From 2 September 1985, the BBAIRS terms became standard market practice. BBA Libor fixings did not commence officially before 1 January 1986. Before that date, however, some rates were fixed for a trial period commencing in December 1984.
Member banks are international in scope, with more than sixty nations represented among its 223 members and 37 associated professional firms as of 2008. Seventeen banks for example contributed at one point to the fixing of US Dollar Libor. The panel contains the following member banks:

Libor was widely used as a reference rate for many financial instruments in both financial markets and commercial fields. There were three major classifications of interest rate fixings instruments, including standard inter-bank products, commercial field products, and hybrid products that often used Libor as their reference rate.
Standard interbank products:

Forward rate agreements
Interest rate futures, e.g. Eurodollar futures
Interest rate swaps
Swaptions
Overnight indexed swaps, e.g. Libor–OIS spread
Interest rate options, Interest rate cap and floor

Commercial field products:

Floating rate notes
Floating rate certificates of deposit
Syndicated loans
Variable rate mortgages
Term loans

Hybrid products:

Range accrual notes
Step up callable notes
Target redemption notes
Hybrid perpetual notes
Collateralized mortgage obligations
Collateralized debt obligations

In the United States in 2008, around sixty percent of prime adjustable-rate mortgages and nearly all subprime mortgages were indexed to the US dollar Libor. In 2012, around 45 percent of prime adjustable rate mortgages and more than 80 percent of subprime mortgages were indexed to the Libor. American municipalities also borrowed around 75 percent of their money through financial products that were linked to the Libor. In the UK, the three-month British pound Libor was used for some mortgages—especially for those with adverse credit history. The Swiss franc Libor was also used by the Swiss National Bank as their reference rate for monetary policy.
The usual reference rate for euro-denominated interest rate products is the Euribor, compiled by the European Banking Federation from a larger bank panel. A euro Libor did exist, but mainly for continuity purposes in swap contracts dating back to pre-EMU times. The Libor was an estimate, not intended for the binding contracts of a company. It was, however, specifically mentioned as a reference rate in the market standard International Swaps and Derivatives Association documentation, which were used by parties wishing to transact in over-the-counter interest rate derivatives.

Definition

Libor was defined as:
This definition was amplified as follows:

The rate that each bank submits must be formed from that bank's perception of its cost of funds in the inter-bank market.
Contributions must represent rates formed in London and not elsewhere.
Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange markets.
The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank's cash, rather than a bank's derivative book.
The definition of "funds" is: unsecured inter-bank cash or cash raised through primary issuance of inter-bank certificates of deposit.

The British Bankers' Association published a basic guide to the BBA Libor, which contains a great deal of detail as to its history and its current calculation.

Technical features

Calculation

Libor was calculated by the Intercontinental Exchange and published by Refinitiv. It was an index that measured the cost of funds to large global banks operating in London financial markets or with London-based counterparties. Each day, the BBA surveyed a panel of banks, asking the question, "At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 am?" The BBA threw out the highest four and lowest four responses, and averaged the remaining middle ten, yielding a 22% trimmed mean. The average was reported at 11:30 am.
Libor was actually a set of indexes. There were separate Libor rates reported for seven different maturities for each of five currencies. The shortest maturity was overnight, the longest one year. In the United States, many private contracts referenced the three-month dollar Libor, which was the index resulting from asking the panel what rate they would pay to borrow dollars for three months.

Currency

In 1986, the Libor initially fixed rates for three currencies. These were the US dollar, British pound sterling, and the Deutsche Mark. Over time, this grew to sixteen currencies. After a number of these currencies merged into the euro in 2000, there remained ten currencies. Following reforms in 2013, Libor rates were calculated for five currencies.
Active until June 2023

US dollar

Inactive from December 2021

Euro
British pound sterling
Japanese yen
Swiss franc

Inactive from 2013

Australian dollar
Canadian dollar
New Zealand dollar
Danish krone
Swedish krona

Note that the Euro LIBOR should not be confused with EURIBOR.

Maturities

Until 1998, the shortest duration rate was one month, after which the rate for one week was added. In 2001, rates for a day and two weeks were introduced. Following reforms in 2013, Libor rates were calculated for 7 maturities.
Active until June 2023

1 day
1 month
3 months
6 months
12 months