What is the primary reason for the phasing out of LIBOR?

The primary reason for the phasing out of LIBOR (London Interbank Offered Rate) is that there was insufficient activity for accurate rate setting. LIBOR was intended to reflect the average interest rate at which major global banks borrow from one another, but over time, the actual transactions that informed these rates diminished significantly. In particular, during the financial crisis, banks became reluctant to borrow from each other due to lack of trust and increased uncertainty about the financial health of peers, which led to a drastic decline in the volume of activity underlying the LIBOR rates.

As a result, the calculation of LIBOR increasingly relied on estimates rather than actual transactions. This situation raised concerns about the reliability and integrity of the benchmark, making it less representative of true market conditions. Consequently, regulatory bodies recognized the need for more robust and transparent interest rate benchmarks that would reflect current market dynamics more accurately. This culminated in the decision to phase out LIBOR and transition to alternative benchmarks, such as SOFR (Secured Overnight Financing Rate) in the U.S., which are based on actual transactions.