London Interbank Offered Rate (LIBOR)

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Picture a farmers market where five trusted stalls each write down, every morning, the price they would charge for a pound of apples that day. The market posts the average of those five numbers on a big board as "today's apple price." Even shoppers who never buy from those five stalls end up using that board as their reference point for what a fair apple price should be.

LIBOR worked the same way, except instead of apples, it was about the Interest rate for borrowing money. Its name spells out what it measured: the London Interbank Offered Rate. "Interbank" means between banks, and "offered rate" means the interest rate being offered. Each business day, a handful of major banks reported the rate they believed they would have to pay to borrow money from another bank for a short stretch of time, anywhere from overnight up to a year. Those reports were combined into one official number for each stretch of time and each major currency, including US dollars and British pounds, and published out of London.

Why anyone outside those banks cared

That published number became a reference point for an enormous number of completely unrelated loans, similar to how the apple market's average price became a reference point for shoppers who never visited those five stalls. A bank, a company, or a movie financier would agree to a Loan priced as "LIBOR plus 3 percent," for example, meaning whatever LIBOR happened to be on a given day, add 3 more percentage points on top as the actual interest owed. This was common enough in movie financing that loans like gap loans, often priced using an Advance Rate against unsold rights, were frequently set up this way too.

What went wrong

In 2012, the public learned that some of the banks reporting their numbers had been cheating: quietly reporting a rate that was not their honest best guess, sometimes to help their own trading bets pay off, sometimes to make themselves look healthier than they really were. This became known as the LIBOR scandal, and it badly damaged trust in a number that trillions of dollars of contracts depended on.

Regulators decided a benchmark this important should not be based on banks simply estimating and self reporting a number every morning. By 2023, LIBOR was fully retired. It was replaced by newer rates, like the Secured Overnight Financing Rate in the United States, which are calculated from real loans that actually happened overnight instead of guesses about what a loan might cost.

Fun facts

• LIBOR is pronounced like "LIE-bor," and stood for London Interbank Offered Rate.
• At its peak, LIBOR was published in five different currencies and seven different loan lengths every single business day.
• If you ever come across an old loan document from before 2023 that mentions "LIBOR," now you know it is naming a retired benchmark rate, not a typo.