Why is LIBOR still used for floating interest rates?
Hi all,
So this is probably a pretty basic question but I haven't been able to find any straight answers for it online as of yet. Basically, I've been reviewing for corporate client banking interviews (more specifically the debt portion) and it is pretty much a given that LIBOR is used as the reference rate for the basis of floating interest rates. Taking into account the huge LIBOR scandal in 2012, why do major banks still rely on LIBOR when it has proven to be unreliable?
There has been discussion of an alternative and I believe I saw some discussion about credit document language discussion the possible alternative to LIBOR. Most term sheets and CA's have a prime option, so it is currently feasible to select something other than L for pricing. I am sure this will continue to develop.
https://www.lsta.org/news-and-resources/news/libor-transition-in-the-lo…
It's just been the market standard. I wouldn't say it's unreliable, more like slightly inaccurate since the LIBOR rates are usually estimated by banks rather than based on actual transactions. You can look up SOFR which is "supposed" to replace LIBOR in the upcoming years but that itself has cons too.
If I’m recalling the article I read a while back, isn’t the plan to move off of LIBOR in the next 5 years?
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