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LIBOR – an introduction and farewell

The fall of Libor has been well-documented, not untypically its demise was predicated upon the more obscure conditions of its rise. Libor began with the syndicated loan market of the late ‘60s. Borrowers wished to raise large amounts in USD, but US banks were restrained from raising these sums onshore by the deposit rate caps mandated by “Regulation Q”. Scenting profit, London banks formed syndicates to recycle offshore USD deposits into USD loans, risk-shared and free from the US domestic regulation. The adverse credit outlook of emerging market borrowers and prevalent interest-rate volatility inclined the syndicates to lend at term on a floating rate, a relatively new financial concept. Mitigating basis risk against US Treasury rates, the syndicates elected to poll their members to create a self-adjudicating average rate. Markets referencing the newly-christened LIBOR quickly became orders of magnitude larger than its first application, feeding on its own burgeoning liquidity LIBOR was on its way to becoming “the world’s most important number”.