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ARTICLE · 29 APRIL 2019

Breakage And Yield Protection In A Post-LIBOR World

Mayer Brown
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This Legal Update discusses the origins of the London interbank offered rate (LIBOR) as a "cost of funds" rate.

United StatesFinance and Banking
David Duffee
David Duffee
Andreas Adler
Andreas Adler
Mae Rogers
Mae Rogers
Jennifer Kratochvil
Jennifer Kratochvil
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The Origins of LIBOR as a "Cost of Funds" Rate

The London interbank offered rate (LIBOR) currently serves as the basis for the interest rate on almost all medium-term US dollar business loans. Banks started using the rate in the late 1960's as an alternative to making loans at fixed rates of interest or at rates of interest based on the US prime rate. As originally conceived, LIBOR for a syndicated bank loan was calculated by taking the fixed rate of interest that a specified bank (participating in the syndicated loan) would offer to pay on a short-term loan1 that it would borrow from another bank; this interbank loan was structured as the borrowing bank selling a short-term deposit2 to the lending bank.3 The interest rate on the syndicated loan would be the average of the rates so offered by a specified group of banks (all participating in the syndicated loan) plus an interest rate margin.4 The interest rate on the syndicated loan was fixed for the term of the

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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