What is LIBOR?
LIBOR is the basic rate of interest used in lending between banks on the London interbank market and as a benchmark for setting interest rates on other loans. It is calculated by the Intercontinental Exchange (ICE) and published by Refinitiv.
After December 31, 2021, its use as a reference rate for new transactions would end. As a result, banks, borrowers, and other stakeholders must learn about alternative rates and begin to change existing LIBOR-referencing contracts. Detailed planning will be required for the LIBOR phase-out.
Example of LIBOR:
Existing debt arrangements could convert from LIBOR to a higher or undesirable reference rate. Amendments to LIBOR-based contracts could also impact earnings that might need to be reflected in financial reporting.
LIBOR serves maturities that range from overnight to one year. The banks work with 35 different LIBOR rates each business day, but the most quoted rate is the three-month U.S. dollar rate.
Why is LIBOR Important?
LIBOR was a reference rate for many transactions in the global financial market. But as the rate was an average of rates quoted by financial institutions, there were instances of rate manipulation, and hence, it is now in the phasing out stage.