The London Interbank Offered Rate, or "LIBOR," is a set of index rates that acts as a benchmark intended to reflect current market conditions. LIBOR is calculated based on the average interest rate used by major global banks to borrow from one another. LIBOR rates exist in five currencies, including U.S. dollars, and for various lengths of time, and are used as a benchmark worldwide. Such index rates are commonly used in setting the interest rate for adjustable-rate consumer financial products, such as mortgages.
It was discovered that between 2006 to 2009, banks and bank employees involved in reporting transactions used to calculate LIBOR had at times manipulated the information to result in a LIBOR rate which would benefit them. Government authorities launched investigations and opened cases against the banks and individuals in multiple countries, including the United States. Private parties also sued banks over the the LIBOR manipulation.
It is expected that the banks reporting the information used to calculate LIBOR will cease to do so in 2021, at which time, LIBOR may be discontinued. Government and financial institutions worldwide are looking for a replacement if and when that occurs.
As of March 2018, there were an estimated $1.3 trillion in consumer loans in the United States with an interest rate based on LIBOR, the majority of which was for residential mortgages. The expected discontinuation of LIBOR could significantly impact these loans and the financial markets more generally.
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