How Was LIBOR Determined?

The London Interbank Offered Rate (LIBOR) was actually a set of several benchmarks that reflected the average interest rate at which large global banks could have borrowed from each other. The former leading indicator used to price loans and other debt instruments, it was produced once a day by the Intercontinental Exchange (ICE) and regulated by the Financial Conduct Authority. Note that in many contexts, LIBOR and it's equivalents have been transitioned to an alterative new rate such as SOFR.

LIBOR Calculation

There was a total of 35 LIBOR rates posted each day; interest rates were compiled for loans with seven different maturities (or due dates) for each of five major currencies, including the Swiss franc, the euro, the pound sterling, the Japanese yen, and the U.S. dollar.

Each morning, just before 11 a.m. Greenwich Mean Time, the ICE Benchmark Administration (IBA) would ask a panel of contributor banks (usually 11 to 16 large, international banks) to answer the following question: “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m. London time?"

Who Can Contribute

Only banks that had a significant presence in the London market would have historically been considered for membership on the ICE LIBOR panel, which was determined annually. For example, the U.S. dollar LIBOR included major banks in the U.S., such as JPMorgan Chase, Bank of America, and Citibank.

The banks confidentially sent their answers for each of the loan maturities, ranging from overnight to one year—annualized interest rates for unsecured funding for a specified period and specified currency. The IBA would then calculate the LIBOR rate using a trimmed mean, throwing out figures in the highest and lowest quartile and averaging the remaining numbers.

LIBOR Publication

Entities that had purchased a license from IBA published the resulting LIBOR rates, as well as all the contributing rates that the banks provide, around 11:55 a.m. each day. The British Bankers Association once stated that these numbers appeared on over one million trading screens around the world and in a wide variety of news sources. Any loans that were tied to one of the LIBOR indices—for example, a three-month U.S. dollar rate—would previously change in lockstep with the new figures.

After the revelation of a price-manipulation scandal in 2012, the terms and administration of LIBOR changed; it was subsequently officially known as ICE LIBOR.

The Bottom Line

LIBOR was calculated based on daily submissions from a panel of major banks. These banks estimated the interest rates at which they could borrow funds from each other in various currencies and maturities. The published LIBOR rates were then determined by averaging these submissions, though LIBOR is no longer published today.