The end of LIBOR

IT HAS been called the world’s most important number. LIBOR, which stands for the London Interbank Offered Rate, is a benchmark interest rate, representing the amount that banks pay to borrow unsecured from each other. Globally, it underpins $260trn of loans and derivatives, from variable-rate mortgages to interest-rate swaps. But LIBOR’s days are numbered. It is due to be phased out in three years. Broadly speaking, LIBOR’s planned demise is a good thing. But that does not mean it will go smoothly.The case for moving away from LIBOR as a reference rate is powerful. The rate is based on a panel of banks submitting estimates of their own borrowing costs. The rigging scandals that made LIBOR notorious in 2012 showed how this process could be manipulated. They have also made many banks nervous of being involved. The interbank market has become less important since the financial crisis, because new rules encourage banks to use other forms of borrowing. That means there are fewer transactions to base the rate on. Anyway, it is unclear why a measure depending in part on banks’ credit risk should be part of an interest-rate swap, say, between two companies.