Banks Will Miss Libor When It's Gone

SOFR vs. Libor.

Libor, the London Interbank Offered Rate, is a lot of things. It is the standard interest rate for floating-rate loans: If a company borrows money at a rate that resets every three months, the rate that resets every three months is normally Libor. (Well, Libor plus a spread: A company might borrow at, say, Libor plus 3 percent or whatever.) It is the reference rate for trillions of dollars of interest-rate derivatives: If you are making some sort of bet on the future of interest rates, there's a decent chance that the interest rate whose future your betting on is Libor. Beyond that, it was -- it's not really anymore, but for a long time it was -- the standard "risk-free rate" that people would use in financial models for pricing other derivatives; if you bought, say, a call option on Microsoft stock, the formula for valuing that call option has a spot to plug in an interest rate, and the interest rate you'd plug in was probably Libor. Almost every part of the financial world was touched by Libor; it was plausibly "the world's most important number"; it was just part of the atmosphere, a basic given of the financial system.