The London Interbank Offered Rate (LIBOR) has long served as a benchmark interest rate in the global financial markets. It is the rate applied when banks lend short-term funds to each other and has been used as an indicator of credit status and cash flows in international financial markets.
LIBOR was officially introduced by the British Bankers’ Association (BBA) in 1986. It was calculated by averaging the rates submitted by major banks in the London financial market. Rates were calculated by maturity and currency, including international currencies such as the dollar, euro, and yen. For example, when a U.S. company issues bonds in Europe, the interest rate is usually determined by adding a margin to the LIBOR. As a result, LIBOR became a standard not only for interbank lending rates but also for global bonds, derivatives, and loan contracts totaling $350 trillion in financial products.
LIBOR operated on a trust-based self-reporting system. Major banks would submit the rates they believed they would be subject to when borrowing funds, and these were averaged. However, after the financial crisis, it was revealed that banks had submitted artificially low rates, distorting market credibility. In 2012, it was uncovered that banks such as Barclays in the U.K., Citigroup in the U.S., and UBS in Switzerland were implicated in manipulating LIBOR, leading to a massive scandal. It resulted in billions of dollars in fines and critically damaged the credibility of LIBOR.
Following this incident, regulatory authorities in various countries pushed for the abolition of LIBOR. It was phased out starting in 2021 and completely ceased in most currencies and maturities by June 2023. In the United States, the Secured Overnight Financing Rate (SOFR), in the U.K. the Sterling Overnight Index Average (SONIA), and the Euro Short-Term Rate (€STR) in the Eurozone have been established as alternative indicators. These rates are based on actual transactions, making them less susceptible to manipulation and enhancing market transparency.
The historical significance of LIBOR is enormous. It served as a common standard during the integration of international financial markets, playing a crucial role in determining the pricing of global financial products. However, the vulnerabilities of the self-reporting structure became a reality, undermining trust in the financial system. While alternative indicators like SOFR have now taken hold, the lessons left behind by LIBOR continue to remind the financial market to remain vigilant.
