By the end of 2021, the London Inter-Bank Offered Rate (LIBOR)
will no longer be the universal benchmark for short-term interest
rates.
This article provides an overview of LIBOR and its importance to
the global financial market, why it is being phased out, the
alternatives that have been identified so far, and how market
participants can prepare for the end of LIBOR.
What is LIBOR and why is it important?
Since 1984, major banks across the world have relied on LIBOR to
determine short-term interest rates. LIBOR reflects the current
rate at which major banks charge each other interest when borrowing
for short periods – anywhere between overnight and 12 months.
Before 7 a.m. London time every day, a panel of banks answers the
question: “at what rate could you borrow funds, were you
to do so by asking for and then accepting inter-bank offers in a
reasonable market size just prior to 11am?”
