The Story of LIBOR

"The Story Of LIBOR"

What is LIBOR?

              LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate, which some of the world’s leading banks charge each other for short-term loans. It stands for Intercontinental Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. LIBOR is administered by the ICE Benchmark Administration (IBA).

                                   

How LIBOR is calculated?

              Banks have to report interest rate they are paying between banks Confident Low interest rate and vice versa .The Libor is an average interest rate calculated through submissions of interest rates by major banks across the world.

LIBOR scandal

              The LIBOR scandal was an event, peaking in 2008, in which financial institutions were accused of fixing the London Interbank Offered Rate (LIBOR). The LIBOR scandal involved bankers from various financial institutions providing false information on the interest rates they would use to calculate LIBOR to fit their own benefit. Evidence suggests that this collusion had been active since at least 2005, potentially earlier than 2003.             

              Deutsche Bank, Barclays, UBS, Rabobank, HSBC, Bank of America, Citigroup, JP Morgan Chase, The Bank of Tokyo Mitsubishi, Credit Suisse, Lloyds, West LB, and the Royal Bank of Scotland were notable in the scandal. Because LIBOR is used in calculating the price of derivative markets, rate of interest all over the World, manipulating it is illegal. 

Who uses Libor?

               Lenders, which is bank and other financial institutions, use LIBOR as the benchmark reference for determining interest rate for various debt instruments.

How is LIBOR manipulated and why?

         Barclays and fifteen other global financial institutions came under investigation by a regulatory authorities for colluding to manipulate the Libor rate beginning in 2003. Barclays manipulated the first Libor during the global economic upswing of 2005–2007 so that its traders could make profits on derivatives pegged to the base rate.

                 Following the onset of the global financial crisis of 2007–2008,Barclays manipulated Libor downward by telling Libor calculators that it could borrow money at  inexpensive rates to make the bank appear less risky and insulate itself. It provided the bank with a degree of stability in an unstable time, as part of a settlement with U.S. and UK authorities, Barclays admitted to  misconduct in the manipulation of rates.

 How have the allegations of manipulation arisen?

              Since the rates submitted are approximate, not actual transactions, Banks could have submitted incorrect figures. Traders at several banks conspired to influence the final average rate that results, the official Libor rate, by agreeing amongst themselves to submit rates that were either higher or lower than their actual estimates.