The LIBOR Scandal

The LIBOR Scandal

What is the LIBOR scandal?

The LIBOR scandal, which erupted in 2020, involved a ploy of bankers from many large financial institutions to manipulate the London Interbank Offered Rate (LIBOR) for profit. LIBOR, which is calculated daily, is believed to reflect the interest rate that banks pay to borrow from each other. It also serves as the basis for determining the rates applied to many other types of loans. Evidence suggests that this collusion has been going on since at least 2005, possibly before 2003.

In the LIBOR scandal, some banks reported artificially low or high interest rates for the benefit of their derivatives dealers, undermining a major benchmark for interest rates and financial products.

Deutsche Bank, Barclays, UBS, Rabobank, HSBC, Bank of America, Citigroup, JPMorgan Chase, Bank of Tokyo Mitsubishi, Credit Suisse, Lloyds, WestLB and Royal Bank of Scotland.

Key points to remember

  • In the LIBOR scandal, bankers reported false interest rates to manipulate the markets and increase their own profits.
  • The scandal, which has gone undetected for years, has involved many large financial institutions.
  • After 2021, LIBOR could be phased out in favor of alternative rate setting systems.

Understanding the LIBOR scandal

The LIBOR scandal was significant because of the central role that LIBOR plays in global finance. LIBOR is used to determine everything from the interest rates that giant companies will pay for loans to the rates that individual consumers will pay for home mortgages or student loans. It is also used in the prices of derivatives.

LIBOR is not a single interest rate, but a range of these, based on different currencies and different loan durations. As the ICE Benchmark Exchange, which currently manages LIBOR, explains, “it is produced for five currencies (CHF, EUR, GBP, JPY and USD) and seven tenors (Overnight / Spot Next, 1 week, 1 month, 2 month”). , 3 months, 6 months and 12 months) based on the submissions of a reference panel composed of 11 to 16 banks for each currency, resulting in the publication of 35 rates each working day applicable in London. “

In the LIBOR scandal, some banks reported artificially low or high interest rates for the benefit of their derivative traders. Since LIBOR is also used as an indicator of a bank’s health, some banks may have been stronger than they were by declaring fictitious rates.

The bravery of the bankers involved in the scandal became apparent when emails and telephone tapes were released during the investigations. Evidence has shown that traders openly ask others to set rates at a specific amount in order for a particular position to be profitable. In the United States and the United Kingdom, regulatory authorities have fined the banks involved in the scandal about $ 9 billion, as well as a multitude of criminal prosecutions. Since LIBOR is used in the pricing of many of the financial instruments used by companies and governments, they have also taken legal action, alleging that the rate setting affected them negatively.

After the disclosure of the collusion with LIBOR, the British Financial Conduct Authority (FCA) removed responsibility for the supervision of LIBOR from the British Bankers Association (BBA) and entrusted it to the ICE Benchmark Administration (IBA). The IBA is an independent UK subsidiary of the United States-based private exchange operator, Intercontinental Exchange (ICE). LIBOR is now commonly known as ICE LIBOR.

However, the FCA has announced that it will only support LIBOR until 2021, when it hopes to switch to an alternative system. The New York Federal Reserve launched a possible replacement for LIBOR in April 2020 called the secure overnight rate (SOFR).

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