Market Perspective

New Year, New Era: 50-Year LIBOR Benchmark to Expire Dec. 31

October 27, 2021
The C2FO Team

Termination of the longtime interest rate standard means financial change for lenders and borrowers. 

The upcoming discontinuation of the London Interbank Offered Rate (LIBOR) after 50 years has international lenders scrambling to adapt. Anyone who extends credit or finances purchases based on LIBOR will experience a change in their basis. 

LIBOR began in 1969 when a small group of British banks partnered to finance an $80 million loan to the then Shah of Iran, according to NPR’s Planet Money podcast. By first independently — and then collectively — assessing their risk tolerance and factors like inflation, the banks created a consolidated yet variable interest rate for the loan, one that would represent what they would charge one another for borrowing short-term funds. Perhaps unknowingly, the banks created the first “floating rate” loan, now an industry standard. 

LIBOR calculations and ramifications

In 1986, the British Bankers Association formalized management of LIBOR, which is calculated daily by gathering loan rates from 18 banks, removing the four highest and four lowest rates, and then averaging the remaining 10. It is published daily by the Intercontinental Exchange. LIBOR is calculated in five currencies: UK pound sterling, the Swiss franc, the euro, Japanese yen and the US dollar.

The LIBOR rate — plus a lender-determined percentage — quickly and sustainably gained widespread adoption for financing mortgages, autos, and business and student loans. According to Forbes, $1.2 trillion worth of residential mortgage loans and $1.3 trillion of consumer loans were priced using LIBOR as of 2019. 

LIBOR’s downfall

LIBOR’s troubles emerged during the 2007-2009 financial crisis when unconventional home-refinancing instruments, among others, tied to LIBOR went awry, resulting in defaults. Its issues compounded in 2012 when large banks’ collaboration in LIBOR rate-setting resulted in charges of collusion and profiteering. Doubts and suspicions about LIBOR’s authenticity subsequently reduced its usage among lenders. 

Seeking reform — and rates that better represented an unbiased market — authorities developed alternative methodologies for determining consumer and business financing rates. 

LIBOR successors

Instead of a single global rate, like LIBOR, separate successor rates have emerged: the Secured Overnight Financing Rate (SOFR) for the United States and the Sterling Overnight Index Average (SONIA) for Europe. 


In 2014, the US Federal Reserve convened the Alternative Reference Rates Committee (ARRC), which was tasked with identifying an alternative to US dollar LIBOR. SOFR was selected by the ARRC in 2017. 

SOFR is determined daily by the New York Federal Reserve in cooperation with the Office of Financial Research. Different from LIBOR’s narrow, bank-led basis, SOFR is defined by the New York Fed as “a broad measure of the cost of borrowing cash overnight collateralized by US Treasury securities in the repurchase agreement (repo) market.” 

SOFR’s attributes include: 

  • The depth and liquidity of underlying markets.

  • Close alignment with how financial institutions fund themselves today.

  • Larger daily transaction volumes — about $1 trillion — than any other US money market.

  • Transparency and resistance to manipulation.

  • US Treasury affiliation.

Lenders have until Dec. 31 to move customers to SOFR-based rates. The shift will require more than $200 trillion in trades and loans to move to new benchmarks. 

Speaking about the lagging transition results through June 2021, Federal Reserve Vice Chair Randal Quarles recently said, “Large firms used alternative rates (non-LIBOR) for less than 1 percent of floating rate corporate loans and 8 percent of derivatives.” 

US banks not complying by Dec. 31 will draw the Fed’s attention. Quarles continued, “Reviewing banks’ cessation of LIBOR use after year-end will be one of the highest priorities of the Fed’s bank supervisors in the coming months.”

For many lenders, much remains to be done in the transition away from LIBOR, including communicating the change to you, their customers. But with Ford recently renewing credit lines up to $15.5 billion using SOFR, the new benchmark’s visibility should rise and its acceptance accelerate. 


In the United Kingdom, SONIA has replaced LIBOR similarly:

  • A committee — The Working Group — was convened by the Bank of England in 2015 and tasked with determining a LIBOR successor.

  • The committee was reformulated in 2018 to include a broad base of financial participants and transition by the end of 2021.

  • SONIA adoption has been slower than hoped (though faster than SOFR by some measures), with banks’ resistance due to the required operational conversions from legacy LIBOR-based systems. 

SONIA’s features resemble SOFR’s, perhaps not surprisingly given the US and UK authorities’ shared reasons for exiting LIBOR. Common SOFR and SONIA characteristics include a broad-based rate paid by banks on low-risk, overnight funds; the backing of liquid underlying markets; transparency via daily rate publishing; and the ability of the rate to change over time. 


According to Reuters, investors are facing a year-end deadline to stop basing new loans and trades on LIBOR. Some LIBOR rates will stop being published after Dec. 31, while others are scheduled to end in mid-2023.

In conclusion

Given the skepticism and declining use of LIBOR, combined with the stability and transparency of market-based replacements SOFR and SONIA, the transition to a new rate standard can benefit regulators, lenders and borrowers. If your current early payment program is based on LIBOR, please look for additional communications from C2FO to ensure that your invoice payments continue uninterrupted. 

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