Lenders are scrambling to adjust to the demise of the benchmark that has determined the cost of a wide range of borrowing for half a century.
For half a century the series of interest rates known collectively as the London interbank offered rate, or Libor, has helped determine the cost of all sorts of borrowing around the world. Now seen as outdated and discredited, the benchmark is being killed off from the end of this year.
Formalised by the British Bankers’ Association in 1986 to help set prices for derivatives and syndicated loans, Libor is used by pension and fund managers, insurance providers, big and small lenders and Wall Street banks that package loans into securities.Some $US370 trillion worth of financial products are tied to the benchmark, including equipment leases, student and auto loans and bank deposits.
In the US, New York state approved a law that provides a further backstop for contracts hatched on Wall Street. President Joe Biden’s administration and the US Federal Reserve are pushing for legislation to mop up anything else. Also unlike Libor, the new rates fail to capture the credit risk that banks assume when they lend to each other.
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