The London Interbank Offered Rate (LIBOR) was the world’s most important benchmark interest rate that was widely used as a reference rate or index rate for financial instruments and loan products totaling hundreds of trillion dollars across the globe.
LIBOR, a multi-use rate, set the base for the borrowing of unsecured short-term funds between large banks in the interbank market, as well as for calculating the interest rate throughout the world on different kinds of loans.
Until Jan. 31, 2014, LIBOR was prefixed with BBA, known as BBA LIBOR, as it was administered by the British Bankers Association (BBA); however, on Feb. 1, 2014, the Intercontinental Exchange Benchmark Administration Limited took over the administration of LIBOR, changing it toICE LIBOR. ICE LIBOR itself was discontinued in June 2023.
Key Takeaways
- LIBOR was used as a reference rate or index rate for financial instruments and loan products.
- As a multi-use rate, it set the base for the borrowing of unsecured short-term funds between large banks in the interbank market.
- It was also used for calculating the interest rate throughout the world on different kinds of loans.
- The rate was prefixed with "BBA" until Jan. 31, 2014, as it was administered by the British Bankers Association (BBA).
- After that date, the Intercontinental Exchange Benchmark Administration (ICE) took over LIBOR, changing the name to ICE LIBOR.
- LIBOR was completely discontinued in 2023.
Origins
The origin of LIBOR goes back to the late 1960s when Minos Zombanakis, a Greek banker, organized a syndicated loan worth $80 million for the Shah of Iran from the newly opened London branch of Manufacturers Hanover (now part of JPMorgan Chase).
The loan was pegged to the average of reported funding costs by a few reference banks. The system eventually evolved and was taken over in 1986 by the British Bankers Association (BBA), which formalized the process related to governance and data collection.
The Intercontinental Exchange, the authority responsible for LIBOR, stopped publishing all LIBOR rates as of June 30, 2023.
Manipulation
The question over LIBOR’s credibility surfaced for the first time during the financial crisis of 2007, when the much-followed rate behaved abruptly and out of line, given other market rates and prices.
In the following years, financial regulators and some public authorities looked into the alleged manipulation of LIBOR. These investigatory processes exposed many weaknesses of LIBOR, challenging its credibility as a standard. The main observations were:
- There was a decline in the use of transaction data for LIBOR submissions.
- The submissions that compile the rate were “subject to manipulation” by banks, as such manipulation could help them project better creditworthiness or improve their trading positions.
- The administrative system of LIBOR had loopholes that provided opportunities for the contributing banks to maneuver rates to suit them. The governance system lacked adequate transparency and accountability resulting in repeated attempts of manipulation.
Though it was clear that some serious misconduct was taking place with regard to LIBOR submissions, nothing substantial was revealed until 2012, when it became clear that banks were misusing their influence over LIBOR. Investigations over the alleged rigging of LIBOR were initiated in more than a dozen banks.
The list notably involved Barclays Bank PLC (BARC), UBS (UBS), Royal Bank of Scotland (RBS), HSBC (HSBC),Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), The Bank of Tokyo-Mitsubishi UFJ (BTMU), Credit Suisse, Lloyds (LLOY), WestLB, and Deutsche Bank (DBK).
In June 2012, Barclays Bank was fined £59.5 million by the Financial Services Authority (FSA) for failings relatedto LIBOR and EURIBOR in accordance withthe Financial Services and Markets Act 2000, mostly between 2005 and 2009. Since Barclays agreed to an early settlement, the fine of £85 million worked out to be £59.5 million after a 30% discount.
Barclays was also fined $453.6 million by U.S. authorities for tampering and false reporting of EURIBOR and LIBOR between 2005 and 2009.
Wheatley’s Recommendation
In June 2012, soon after Barclays' findings were announced (which was only one of the many investigations), the UK Chancellor of the Exchequer commissionedMartin Wheatley (then Managing Director of the Financial Services Authority and Chief Executive designate of the Financial Conduct Authority)to set up an independent review of the various aspects of LIBOR.
The most important recommendation made by the Wheatley Review of LIBOR (Final Report) was to hand over LIBOR to a new administrator. According to the Wheatley Review, “The BBA should transfer responsibility for LIBOR to a new administrator, who will be responsible for compiling and distributing the rate, as well as providing credible internal governance and oversight. This should be achieved through a tender process to be run by an independent committee convened by the regulatory authorities.”
Following the Wheatley Review Recommendation, the Hogg Tendering Advisory Committee selected anew administrator of LIBOR via a rigorous competitive tender process. The Hogg Tendering Advisory Committee recommended the Intercontinental Exchange Benchmark Administration (IBA) as the new administrator in mid-2013.
Intercontinental Exchange Group (ICE), a prominent name in the financial world, has a vast network of regulated exchanges and clearinghouses for commodity and financial markets. The IBA, British Bankers Association (BBA), and other industry organizations worked together to ensure a smooth transition of BBA LIBOR to ICE LIBOR.
On Feb. 1, 2014, the ICE Benchmark Association became the official administrator of LIBOR, bringing more transparency, as well as a robust oversight and governance framework.
What Does LIBOR Stand for?
LIBOR stands for London Interbank Offered Rate. It was the interest rate at which banks lent to one another for short-term loans in the interbank market.
Is LIBOR Still Used in 2023?
LIBOR is no longer in use as of June 30, 2023. Some synthetic LIBOR rates will continue for a short period; however, for all intents and purposes, LIBOR has ceased to exist.
What Is LIBOR Replaced by?
In the U.S., LIBOR has been replaced by SOFR, the Secured Overnight Financing Rate. SOFR uses actual transactions in the overnight lending markets to derive its rate and incorporates the cost of borrowing for a larger group of market participants.
The Bottom Line
The change in the LIBOR administrator did not alter the process of collecting submissions or the way the rate was calculated; however, due to the LIBOR scandals, the Intercontinental Exchange (ICE) stopped the publication of LIBOR. One-week and two-month U.S. dollar LIBOR ceased publication in 2021 and the remaining tenors ceased publication on June 30, 2023.
