Financial institutions: Fundamentals of LIBOR phase out and transition
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(Updated August 2020)
The London Interbank Offered Rate (LIBOR) has been a common rate used by financial institutions since the 1980s. Acting in both lending and borrowing capacities, LIBOR has been commonplace as a standardized base (reference) rate in financial contracts ranging from lending agreements to interest rate swap contracts to bonds. There were major criticisms of LIBOR following the financial crisis, such as it lacking the market-driven inputs necessary to serve as a benchmark. These criticisms led to the expected phase out of LIBOR by the end of 2021, which means one or more replacement benchmark rates need to be identified. Our article, Financial institutions: Fundamentals of LIBOR phase out and transition, provides additional background on the LIBOR phase out, as well as information about the efforts underway to identify replacement reference rates. Our article also discusses the operational complexity financial institutions will experience in transitioning from LIBOR to a replacement rate, and the efforts of the Financial Accounting Standards Board to provide optional expedients that will ease the accounting for that transition.