You may be familiar with the term “LIBOR.” It stands for the London Interbank Offering Rate, and had been used for decades by banks worldwide for interbank short-term lending and more popularly as the base rate in the U.S. for calculating the interest on a variety of personal loans. Well, it’s gone. As of July first this broadly accepted standard had ceased to exist. What caused its demise, and is there a viable replacement?

LIBOR’s origins can be traced back to a syndicated loan put together by a Greek banker for the Shah of Iran at the London branch of a major U.S. bank in the late 1960s. The banker used funding costs reported from several reference banks to determine the interest rate to be applied. This approach caught on as the syndicated loan market grew, and by 1986 the British Bankers Association (BBA) had formalized the process and the term “LIBOR” and had taken over governance.

For the next twenty years LIBOR’s acceptance grew globally, not only for interbank lending but also for mortgages, auto loans, student loans, and financial derivatives. The first hint that something was improper about this standard came in the midst of the financial crisis of 2008, when the rate appeared to be significantly out of line with other market rates. That unexpected behavior led to investigations by U.S., U.K., and other financial regulators. They found that the data submitted to the BBA was subject to manipulation by the reference banks for the purpose of increasing those banks’ creditworthiness or, even worse, gaming the trading of financial assets.

By 2012 investigators had determined that more than a dozen banks had been intentionally rigging the LIBOR standard. Over $10 billion in fines were ultimately meted out to many of the biggest banks in the world, including Barclays Bank, UBS, Royal Bank of Scotland, HSBC, Bank of America, Citigroup, JPMorgan Chase, The Bank of Tokyo-Mitsubishi UFJ, Credit Suisse, and Deutsche Bank. It was one of the broadest scandals ever to hit the elite of the banking industry.

Ultimately U.K. regulators determined that a new administrator was needed. After a rigorous evaluation process they selected the Intercontinental Exchange (ICE), a global clearinghouse for trading commodities and other financial products. Although the ICE brought more transparency and oversight to the management of LIBOR, the scandal had so tainted the public’s trust in the financial system that regulators further decided that a new benchmark was needed.

However, replacing one of the most widely used financial benchmarks in the world was no simple task. The first step was to come up with an alternative. U.S. regulators settled on the Secured Overnight Funding Rate (SOFR), a broad measure of the overnight borrowing cost of cash collateralized by U.S. treasury bonds. This benchmark is based on actual transactions rather than on bank reporting, making it more reliable than LIBOR. Europe chose a similar metric called Sterling Overnight Interbank Average (SONIA) as their replacement benchmark.

The next step was to create a transition plan. The ICE announced that they would stop publishing LIBOR after June 30, 2023. This gave the U.S. financial industry about nine years to transition some $1.4 trillion of loan contract interest rates from LIBOR to SOFR. Described by one bank executive as a “herculean effort,” it was remarkably successful. As of today only about 8% of the loan market – primarily borrowers struggling to refinance the loans at the higher SOFR rate – remains pegged to LIBOR.

If you borrow money these days for a major purchase such as a house or a car, you will most likely encounter SOFR. We’ll have to wait and see if this new benchmark can stand the test of time.