US Dollar Libor Is Dead! What It Was, What Comes Next

For half a century the series of interest rates known collectively as the London interbank offered rate, or Libor, has helped determine the cost of all sorts of borrowing around the world. But over the last decade it became seen as outdated and discredited, and a decision was made to kill off most versions of the benchmark at the end of 2021. The notable exception was US dollar Libor, which was published for the last time on June 30. In the years since the UK Financial Conduct Authority’s declaration that Libor was ending, the financial world has raced to adjust the terms in contracts on hundreds of trillions of dollars’ worth of products — from mortgages and credit cards to interest-rate swaps. Yet there are still corners of the system that have yet to transition, and Libor will continue to exist as a shadow of its former self.

At one point, Libor was a daily average of what banks said they would charge to lend to one another. It was offered in five currencies and over various time periods of up to one year. Formalized by the British Bankers’ Association in 1986 to help set prices for derivatives and syndicated loans, Libor was used by pension and fund managers, insurance providers, big and small lenders and Wall Street banks that package loans into securities. In recent years, some $370 trillion worth of financial products were tied to the benchmark, including equipment leases, student and auto loans and bank deposits. The biggest component was derivatives such as interest-rate swaps — trades of a fixed interest rate for a floating one or vice versa — which were used by companies, banks and investors to hedge risk or speculate. Of the five Libor currency rates, the one tied to the US dollar (“dollar Libor”) was most widespread, accounting for more $200 trillion worth of products.