What Is London Interbank Offered Rate (LIBOR)?

The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.

LIBOR, which stands for London Interbank Offered Rate, serves as a globally accepted key benchmark interest rate that indicates borrowing costs between banks. The rate is calculated and will continue to be published each day by the Intercontinental Exchange (ICE), but due to recent scandals and questions around its validity as a benchmark rate, it is being phased out. According to the Federal Reserve and regulators in the UK, LIBOR will be phased out by June 30, 2023, and will be replaced by the Secured Overnight Financing Rate (SOFR). As part of this phase-out, LIBOR one-week and two-month USD LIBOR rates will no longer be published after December 31, 2021.1

Key Takeaways

  • LIBOR is the benchmark interest rate at which major global banks lend to one another.
  • LIBOR is administered by the Intercontinental Exchange, which asks major global banks how much they would charge other banks for short-term loans.
  • The rate is calculated using the Waterfall Methodology, a standardized, transaction-based, data-driven, layered method.
  • LIBOR has been subject to manipulation, scandal, and methodological critique, making it less credible today as a benchmark rate.
  • LIBOR is being replaced by the Secured Overnight Financing Rate (SOFR) on June 30, 2023, with phase-out of its use beginning after 2021.