LIBORLIBOR
LIBOR, the London Interbank Offered Rate, was a benchmark showing the average rate at which major banks said they would lend to each other short term. After a manipulation scandal it was phased out, with US dollar LIBOR ending in June 2023 and largely replaced by SOFR.
For decades, trillions of dollars of loans, mortgages and derivatives were priced off one number: LIBOR. It was based on banks' own estimates of borrowing costs — which turned out to be easy to manipulate. The scandal led regulators to retire LIBOR and move markets to transaction-based rates like SOFR. This entry explains what LIBOR was, why it ended and what replaced it.
- Category
- Bonds and Interest Rates
- Reading time
- 3 min
- Also called
- London Interbank Offered Rate, LIBOR transition, LIBOR replacement
- Updated
LIBOR in plain words
LIBOR was a benchmark rate representing the average rate at which major global banks were willing to lend to each other short term.1
It served as a reference rate for many products, including floating-rate loans.1
SOFR, the Secured Overnight Financing Rate, is a reference rate used to price loans and other dollar products.2
How LIBOR worked, step by step
Banks submitted estimates
What they'd pay to borrow.
Outliers were trimmed
Highest and lowest removed.
An average was published
For several currencies and terms.
Contracts referenced it
Loans, swaps, mortgages. See Floating-Rate Notes.
Manipulation scandal
Submissions were rigged.
Phased out
Replaced by SOFR and others. See SOFR.
Worked examples
Example 1 — A LIBOR loan
5% loanA company borrows at 3-month LIBOR + 2% when LIBOR is 3%.
| Rate | 3% + 2% = 5% |
| On $10m | $500,000 a year |
LIBOR served as the reference rate for floating-rate loans.1
Example 2 — Small manipulation, big effect
Huge impactA submission shaves 0.05% off LIBOR on $300 trillion of linked contracts.
| Annual effect | $300tn × 0.05% = $150bn |
Because so much depended on LIBOR, even tiny distortions mattered enormously. See Spoofing, Layering and Wash Trading.
Example 3 — Transition to SOFR
ConvertedA loan at LIBOR + 2% converts to SOFR + 2.26% (including a spread adjustment).
| New benchmark | SOFR |
SOFR is a reference rate for pricing loans and dollar products. See SOFR.
LIBOR vs SOFR
| Aspect | LIBOR | SOFR |
|---|---|---|
| Based on | Bank estimates | Actual repo transactions |
| Credit risk | Includes bank credit risk | Secured, near risk-free |
| Terms | Overnight to 12 months | Overnight (term versions exist) |
| Status | Discontinued | Main US benchmark |
Why LIBOR still matters
Legacy contracts
Old loans and swaps needed conversion. See Interest Rate Swap.
Benchmark design
Lessons for reliable rates.
Market history
Understanding past pricing.
Reading old filings
Many documents reference LIBOR. See EDGAR.
Advantages and disadvantages
Advantages
- Was a single global standard.
- Covered many currencies and terms.
- Easy to reference.
Disadvantages
- Based on estimates, not trades.
- Open to manipulation.
- Underlying market shrank.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why it ended
Beginner
LIBOR's decline began with a scandal over manipulated submissions.1 See Spoofing, Layering and Wash Trading.
Key dates
Intermediate
Most LIBOR settings ended after December 31, 2021, and the main US dollar settings ended after June 30, 2023, with synthetic versions used temporarily.1
Secured vs unsecured
Advanced
SOFR is based on overnight repo transactions secured by Treasuries, so it lacks LIBOR's bank credit component. See Repo Market.
Common mistakes
Assuming LIBOR still exists
It has been retired.
Treating SOFR as identical
It behaves differently in stress.
Ignoring spread adjustments
Conversions added a spread.
Forgetting other currencies
Each moved to its own benchmark.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- LIBOR was a key interbank lending benchmark.
- It was based on bank estimates.
- A manipulation scandal led to its end.
- US dollar LIBOR ended in June 2023.
- SOFR is the main US replacement.
Frequently asked questions
Why was LIBOR manipulated?
Does LIBOR affect me today?
What replaced sterling LIBOR?
Further learning
- SOFR
The replacement.
- Repo Market
Where SOFR comes from.
- Interest Rate Swap
A major LIBOR user.
- Eurodollars
The market LIBOR measured.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. LIBOR: Why It Was Phased Out and What Replaced It (opens in a new tab) Checked .
- Corporate Finance Institute. SOFR (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.