What is happening with LIBOR rate in the financial world?

Mario Ernesto Ayala

At the end of 2021, the international LIBOR rate (London Interbank Offer Rate) will be replaced. This will affect the financial world by having to adjust contracts for hundreds of billions of dollars in mortgages, credit cards, and derivatives.

The LIBOR rate is used to determine the cost of loans around the world and has been of great importance to both large and small banks, as well as pension and fund managers, insurance companies, and Wall Street banks that transform loans into securities.

The main reasons for this decision were the limitations of this international reference rate to accurately reflect information on financial transactions, as well as its susceptibility to being manipulated.

Central banks have developed benchmark rates to reflect the cost of capital more accurately and to be based on actual transactions. Some of them are SOFR (US Overnight Guaranteed Finance Rate), Sonia (Daily Average Index to UK Pound Sterling), and ESTR (short-term interest rate of the euro). These primarily reflect current loan rates; however, LIBOR offers forward rates that incorporate market expectations for the cost of borrowing, from one day to one year.

By 2022 LIBOR will no longer be published, which will affect the contracts that took it as a reference for other rates in dollars, sterling, euro, yen, and the Swiss franc. For this reason, we advise anticipating modifying the contracts that refer to the LIBOR RATE, especially in those sections that regulate its variability.