However, this won’t fully happen until 2021, so it is still an important term to understand. During the height of its use, LIBOR was used as a measure of the health of the entire global financial system – as a higher interbank borrowing cost implies low confidence in a bank’s ability to repay the loan.
The LIBOR rate is calculated daily, by surveying different banks around the world and averaging the findings to set the day-to-day interbank borrowing rate.
A brief history of LIBOR
LIBOR was created as a uniform measure of interest rates across different banks. It became necessary during the rapid expansion of the interest rate market in the 1980s.
The British Bankers’ Association (BBA) set up BBA settlement rates for interest levels in 1984, before these were developed into the BBA LIBOR in 1986.
LIBOR was used for many years and was the benchmark interbank lending rate. However, this all changed when LIBOR was the subject of a scandal in which it was revealed that banks had been falsely increasing or decreasing their interest rates to affect the average. This was an attempt to profit from trades, as well as to give the impression that a bank appeared more creditworthy than it was.
Investigators found that LIBOR had been the subject of unfair manipulation since at least 1991. The uncovering of the scandal was the reason that the BBA handed over responsibility for maintaining the rate to the ICE in February 2014, at which point BBA LIBOR changed to Intercontinental Exchange (ICE) LIBOR.
As a result of the LIBOR scandal, it was agreed that the rate would be phased out and replaced by a series of alternate interest rates to determine the borrowing cost between banks.
