What Was LIBOR?
The London Interbank Offered Rate was, for decades, the world's most important number. Published each London business day across multiple currencies and tenors, it served as the floating-rate benchmark for syndicated loans, mortgages, student loans, and an enormous derivatives market. A typical leveraged loan was quoted as LIBOR plus a spread, resetting every one or three months.
Crucially, LIBOR was built on judgment rather than transactions. Panel banks submitted estimates of what it would cost them to borrow unsecured from other banks, and the unsecured interbank lending market those estimates described had largely dried up after the 2008 crisis. The benchmark ended up resting on hypothetical answers to a hypothetical question, which made it fragile and manipulable.
How LIBOR Was Set, and Why It Failed
Each day a panel of large banks, sixteen for the US dollar rate, submitted their estimated borrowing costs. The administrator discarded the highest and lowest quartiles and averaged the rest, publishing the result as that day's fixing. Oversight passed from the British Bankers' Association to ICE Benchmark Administration in 2014 after the scandal broke.
Investigations revealed that traders had pressured submitters to nudge fixings up or down to benefit derivative positions, and that some banks lowballed submissions during the crisis to appear healthier. Barclays paid roughly $450 million in June 2012 to settle the first case, and total penalties across global banks ultimately ran into the billions. The scandal proved a judgment-based benchmark controlling trillions in contracts could not survive.
The Transition and Why It Still Matters
Regulators orchestrated a decade-long migration to transaction-based replacement rates, with the US adopting SOFR and the UK adopting SONIA. Most LIBOR settings ceased at the end of 2021, and the remaining US dollar tenors were published for the last time on June 30, 2023. Legacy contracts converted through fallback language, typically adding a fixed credit spread adjustment to the new rate to compensate for LIBOR's embedded bank risk.
LIBOR remains relevant to practitioners because older credit agreements, interest rate swaps, and case studies still reference it, and interviewers use the transition to test whether candidates understand how floating-rate debt actually prices. Knowing why loans now say SOFR plus a spread, and where the extra basis points in older deals came from, signals genuine fluency in credit markets.
