LIBOR (London Interbank Offered Rate) is an interest rate index setting forth the rate at which major financial institutions will lend to each other. The rate is calculated as an average of the estimates from various leading banks. But LIBOR is not just for investors on Wall Street. LIBOR can be critically important for a wide array of entities and individuals, as it is used by financial institutions, banks and credit card companies as the primary index to determine variable interest rates on various types of loans. Despite LIBOR’s prominence, the index may be going away in 2021.
Due in part to past abuse and manipulation, the mega-banks that provide the estimates for LIBOR will no longer be required to do so. And what that means for outstanding loans – not to mention future lending – remains unclear. This is particularly true with respect to many existing LIBOR-based loans, which do not contemplate a post-LIBOR world. It is possible that existing borrowers under LIBOR-based loans will be required to renegotiate the terms and conditions of their existing loans, which could lead to increased costs for such borrowers.
Alternatively, a new index may replace LIBOR as the benchmark for worldwide variable interest rates. In the United States, the likely frontrunner is SOFR (Secured Overnight Financing Rate). Unlike LIBOR, which is derived from unsecured borrowing transactions of banks, SOFR is derived from the cost of secured borrowing/lending with U.S. Treasuries as collateral. Until the future of LIBOR becomes more apparent, SOFR will likely operate alongside LIBOR in determining interest rates until more loans are backed by SOFR. The future of LIBOR is uncertain, but given its prevalence, any transition away from it will likely be a bumpy one.« Back to news