Libor, short for the London Interbank Offered Rate, is a widely used benchmark interest rate that leading banks charge each other for short-term loans. It is often regarded as an indication of the prevailing market interest rates and serves as a reference for many financial products and transactions. Libor is calculated daily for various currencies and maturities by the Intercontinental Exchange (ICE) Benchmark Administration.
The calculation of Libor involves a panel of major banks reporting their borrowing costs, with the highest and lowest rates removed, and an average of the remaining rates is determined. Libor rates are published for durations ranging from overnight to twelve months and for currencies including the US dollar, British pound, euro, Japanese yen, and Swiss franc.
Due to its widespread use, Libor is utilized as a reference rate for a vast array of financial contracts, including adjustable-rate mortgages, student loans, credit cards, derivatives, and corporate debt. The rate is particularly relevant in the international financial market and plays a crucial role in determining borrowing costs for individuals, businesses, and governments.
However, Libor has faced criticism and regulatory scrutiny since the global financial crisis for being susceptible to manipulation, which prompted an ongoing effort to reform and transition to alternative benchmark rates. In 2017, the UK's Financial Conduct Authority (FCA) announced its intention to phase out Libor by the end of 2021 and has been working with market participants to adopt alternative reference rates, such as the Secured Overnight Financing Rate (SOFR) in the United States.
