What is the LIBOR Curve
The LIBOR curve is the graphical representation of various maturities of the London Interbank Offered Rate (LIBOR), which is the short-term floating rate at which large banks with high credit ratings lend to each other. The LIBOR curve is usually depicted for short-term periods of less than one year.
BREAKING DOWN LIBOR Curve
LIBOR is the world's most widely used benchmark for short-term interest rates. It serves as the primary indicator for the average rate, at which contributing banks may obtain short-term loans in the London interbank market. Currently, there are 11 to 16 contributor banks for five major currencies (USD, EUR, GBP, JPY, CHF). LIBOR is set for seven different maturities. The LIBOR curve plots rates against the corresponding maturities.
The LIBOR curve and the Treasury yield curve are the most widely used proxies for the risk-free interest rates. Although not theoretically risk-free, LIBOR is considered a good proxy against which to measure the risk/return tradeoff for other short-term floating rate instruments. The LIBOR curve can be predictive of longer-term interest rates and is especially important in the pricing of interest rate swaps.
Phasing-Out of LIBOR?
Abuse of the LIBOR system for personal gain was uncovered in the wake of the financial crisis that began in 2008. Massive dislocations in global banking enabled individuals working at contributor banks to manipulate LIBOR rates. In 2013, the Financial Conduct Authority (FCA) of the U.K. took over the regulation of LIBOR. Currently, plans are under consideration to phase out the LIBOR system by 2021 and replace it with a benchmark based on U.S. Treasury repo rates or the Sterling Overnight Index Average.