LIBOR Scandal

To those who have been in the financial industry for many years, or to those who actually keep up with the financial health across the countries, I'm sure you have heard about the Libor rate being rigged in 2012. LIBOR stands for the London inter-bank offered rate which is actually an interest rate benchmark set for many other rates, from commercial loans to mortgages.  Besides that, it serves to be an important index for derivatives and it is also the most widely used interest rate in the world.

On every business day, the major banks in London will give information as at which interest rate would they expect to pay on a loan from another bank to Thomson Reuters and Thomson Reuters collect rates from panel banks, and the highest and lowest 25% of value will be eliminated. Then, an average is calculated from the 50% remaining mid values to produce the official LIBOR rate.

Why is LIBOR rate so important?

• A benchmark in the world for short-term interest rates.
• It is used as the base rate for a large number of financial products.
• Also used as a base rate to set the interest rates such as loans, savings and mortgages

Back to the scandal.

The scandal happened in 2012 where Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions, leading to the scandal.  Because Libor rate is used in the US derivatives markets, an attempt to manipulate the Libor rate means an attempt to manipulate the US derivatives markets.  The manipulation of submissions of interest rates can have negative effects on consumer and financial markets globally.  Due to this scandal, many authorities have started investigating when did banks started rigging the rate and some mentioned it happened 10 years ago or some said it was as early as 1991.  It was not only Barclays Bank who was involved in the scandal, but there were other major banks involved too, such as, Royal Bank of Scotland (RBS), JP Morgan, UBS, Citigroup and Bank of America, which they had been fined over $9bn.  

What do you think about the idea of rigging the Libor rate which it was such an important rate that many banks in the world use it as a base rate?  I personally think it was really unethical of these banks to manipulate the Libor rate.  Shareholders' values in these banks definitely have gone down and it definitely takes time to regain their value as this scandal has a big impact in those who are involved, as it was not fair to consumers that they are using an inaccurate interest rate that was being charged.  Banks definitely have breached the core values and objectives of the companies itself. 

Let me know what you think about the LIBOR Scandal in the comments below!