Glossary term
Interbank Offered Rate
An interbank offered rate is a benchmark rate intended to reflect the cost at which banks can borrow from one another for a given term and currency.
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What Is an Interbank Offered Rate?
An interbank offered rate is a benchmark interest rate intended to reflect the rate at which banks can borrow from one another for a specific currency and maturity. Historically, the best-known example was LIBOR, which was used in loans, derivatives, bonds, and other financial contracts around the world.
The phrase is broader than any single benchmark. Different currencies and markets have used different interbank offered rates, and many contracts have moved toward alternative reference rates after concerns about the reliability of bank-submitted benchmarks.
Key Takeaways
- An interbank offered rate is meant to represent bank borrowing costs for a currency and term.
- LIBOR was the most widely known interbank offered rate, but it has largely been replaced in new contracts.
- These rates were used in floating-rate loans, swaps, bonds, and other financial products.
- Benchmark reform shifted many markets toward transaction-based or nearly risk-free reference rates.
How IBORs Were Used
Interbank offered rates became common reference points because many financial contracts need a floating rate that changes over time. A loan might charge a benchmark rate plus a margin, while a derivative might exchange payments based on a benchmark over a set period. The benchmark gave both parties a shared reference for calculating interest.
In practice, an interbank offered rate was not the same as the rate paid by a household or business borrower. Borrowers usually paid the benchmark plus a spread that reflected credit risk, product type, lender margin, and contract terms.
Use Case | How the Benchmark Functioned |
|---|---|
Floating-rate loans | Reset interest charges at scheduled intervals. |
Interest-rate swaps | Provided the floating-rate leg for payments. |
Floating-rate notes | Adjusted coupon payments as the benchmark changed. |
Fallback language | Defined what happens if the benchmark is unavailable. |
Benchmark Transition
Benchmark reform became necessary because some interbank offered rates relied on submissions rather than deep transaction data, and because underlying unsecured interbank borrowing markets became less active. In the United States, many new contracts now reference SOFR, a rate based on transactions in the Treasury repurchase market, rather than U.S. dollar LIBOR.
For readers, the key practical issue is contract language. Older floating-rate loans, bonds, and derivatives may contain fallback provisions that explain how the rate changes if the original benchmark is discontinued or no longer representative.
The Bottom Line
An interbank offered rate is a benchmark for bank funding costs, not a consumer rate by itself. It became important because it was written into many financial contracts, and its reform shows why benchmark design and fallback language matter.