LIBOR: Why the Benchmark Interest Rate Was Phased Out

The benchmark interest rate charged by banks for short-term loans

Written by CFI Team

Reviewed by Jeff Schmidt

Read Time 4 minutes

Over 2 million + professionals use CFI to learn accounting, financial analysis, modeling and more. Unlock the essentials of corporate finance with our free resources and get an exclusive sneak peek at the first module of each course. Start Free

What Was LIBOR?

LIBOR, or the London Interbank Offered Rate, was a benchmark interest rate that represented the average rate at which major global banks were willing to lend to each other on a short-term basis. It was calculated for five currencies (USD, GBP, EUR, JPY, CHF) and multiple borrowing periods, or “tenors,” ranging from overnight to 12 months.

LIBOR served as a reference rate for a wide range of financial products, including:

Floating-rate loans.
Interest rate swaps.
Securitized products.
Adjustable-rate mortgages.
Corporate credit facilities.

At its peak, LIBOR influenced the pricing of more than $300 trillion in contracts worldwide.

LIBOR

Why LIBOR Was Phased Out

Scandals and Reliability Issues

LIBOR’s decline started with a scandal.

In the wake of the 2008 financial crisis, investigations revealed that some banks had manipulated LIBOR submissions to benefit trading positions or project financial stability. Since LIBOR was based on self-reported estimates and not actual transactions, it became clear that the rate could be gamed.

Even beyond the scandal, LIBOR was losing relevance. The underlying interbank lending market had shrunk dramatically, making the rate less reflective of real-world borrowing conditions.

Regulatory Push for Reform

In response, regulators worldwide called for a transition to benchmark rates that were based on actual transaction data, not expert judgment. The goal was to create more transparent, reliable, and robust alternatives.

The Financial Stability Board, Federal Reserve, Bank of England, and other authorities began working with industry groups to identify and adopt new reference rates.

LIBOR Phase-Out Timeline: Key Dates

The LIBOR transition unfolded in phases, with key dates varying by currency and tenor to allow markets time to adjust.

The key milestones included:

December 31, 2021

Publication of most LIBOR settings ended for GBP, EUR, CHF, and JPY, as well as 1-week and 2-month USD LIBOR.

June 30, 2023

All remaining USD LIBOR settings (overnight, 1-, 3-, 6-, and 12-month) were officially discontinued.

Synthetic LIBOR Through 2024

For certain legacy contracts, regulators permitted the temporary use of “synthetic LIBOR” for GBP and USD through the end of 2024. These synthetic rates are not for use in new contracts.

What Replaced LIBOR?

As LIBOR was phased out, regulators and industry working groups introduced a set of risk-free rates (RFRs) to serve as its replacements. These new benchmarks are rooted in real transaction data, making them more reliable and transparent than the estimates that LIBOR relied on.

New Benchmark Rates by Currency

Each currency now has its own official replacement rate, selected based on local market activity:

USD: SOFR – Secured Overnight Financing Rate (based on U.S. Treasury repo transactions)
GBP: SONIA – Sterling Overnight Index Average
EUR: €STR – Euro Short-Term Rate
JPY: TONA – Tokyo Overnight Average Rate
CHF: SARON – Swiss Average Rate Overnight

These benchmarks were chosen for accuracy and alignment with how money actually moves through today’s global financial system.

Key Differences from LIBOR

The switch from LIBOR to RFRs brought several important changes:

Data-driven calculation: RFRs are based on completed trades, rather than bank estimates.
Overnight format: Most RFRs are overnight rates without the forward-looking term structures LIBOR offered, though term versions are emerging in some markets.
Minimal credit risk: LIBOR reflected interbank credit risk. RFRs do not, which makes them more stable in times of market stress.

Together, these changes aim to make interest rate benchmarks more consistent, objective, and aligned with real-world conditions.

Impacts of the LIBOR Transition

From loan contracts to financial models, nearly every process that relied on LIBOR had to be reexamined and updated. Here’s where the impact has been most significant:

Contracts: Loan and derivative agreements needed updated fallback language to account for the end of LIBOR. For legacy deals, many converted to synthetic rates or alternative benchmarks.
Financial models: Present value calculations and valuation models that previously used LIBOR as a discount rate were updated to reflect alternative RFRs like SOFR.
Benchmarks and analytics: Historical LIBOR-linked benchmarks needed to be redefined or discontinued, impacting performance tracking and risk assessments.

Replacing LIBOR required widespread changes to financial systems, disclosures, modeling practices, risk frameworks, and internal processes.

What Finance Professionals Should Know Now

The end of LIBOR doesn’t mean the transition work is over. Many contracts, models, and systems are still adjusting to the new reference rates. For finance professionals, it’s important to stay informed about how these changes may affect day-to-day responsibilities and long-term planning.

Understand replacement rates like SOFR and SONIA, including how they’re calculated and applied.
Review contract language, especially for floating-rate instruments that may still reference LIBOR or use fallback provisions.
Stay aligned with current standards, including regulatory updates, documentation protocols, and market conventions.

Keeping up with these developments helps ensure consistency in pricing, risk management, and reporting across finance functions.

LIBOR’s Legacy and What Comes Next

Phasing out LIBOR marked a global shift toward more transparent, transaction-based benchmarks that better reflect real market activity. It affected how interest rate risk is managed and how financial instruments are priced.

Professionals who understand how the new rates work can apply them more effectively in pricing, modeling, and risk analysis.

Want to build deeper expertise in interest rates, fixed income, and global markets?
Explore CFI’s Capital Markets & Securities Analyst (CMSA®) Certification program to sharpen your knowledge and advance your career.

Additional Resources

CFI offers the Capital Markets & Securities Analyst (CMSA®) certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: