ESTR vs LIBOR
The London interbank offered rate (LIBOR) is the average of 35 different benchmark interest rates that cover five major currencies – the US dollar, euro, British pound, Japanese yen and Swiss franc.
Unlike ESTR and other newer benchmarks, LIBOR is not transaction based, but is taken from a survey. It asks banks at what rate they would borrow money at a specific time – the 25% highest and lowest rates are dismissed, and the ‘middle’ rates are used to calculate the average.
The rate was used to secure financial contracts globally. However, LIBOR started to decline in use following the scandal in 2012, in which major financial institutions manipulated the LIBOR rate. This increased the demand for a transaction-based system and led to the creation of replacement indices. For example, the selected alternative rate in the US is the secured overnight financing rate (SOFR), and the new rate in the UK is the reformed sterling overnight index average (SONIA).