There's been a lot of talk lately about LIBOR and we wanted to break down the top five things you should know about the loan rate.
- LIBOR stands for the London Interbank Offered Rate and is a benchmark interest rate in which banks globally lend to one another. It is based on rate quotes submitted by a collection of banks in the London market.
- LIBOR was first introduced in 1986 and now over $400 trillion of transactions across the world are based off of LIBOR. It is used for a variety of financial transactions from mortgages to credit cards to business loans.
- The rate is being phased out on December 31, 2021, because it no longer meets the International Organization of Securities Commissions (IOSCO)’s benchmark standard for a rate index. The Principles for Financial Benchmark was updated in July 2013.
- As a result of the transition away from LIBOR, the US Federal Reserve Board and Federal Reserve Bank of New York created the Alternate Reference Rates Committee (ARRC) in 2014 to ensure a successful move away from LIBOR to a more robust reference rate.
- The proposed new rate from ARRC is called the Secured Overnight Financing Rate (SOFR) and there are still active discussions within the banking industry on how SOFR or an alternative rate to SOFR should be used to replace LIBOR in 2021.