7/31/2019 Libor or Liebor Scandal
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LIBOR or LIEBOR?
The recent London Interbank Offered Rate ( LIBOR) scandal has
cost Barclays heavily with its top 3officials including the CEO Bob
Diamond resigning from the firm. Before digging into the LIBOR
scandal,
let us first get an insight into what LIBOR is all about.What is
Libor?
LIBOR, or the London Interbank Offered Rate, is the average
interest rate estimated by leading banks inLondon that they would
be charged if borrowing from other banks in the London interbank
market.Libor is calculated and published by Thomson Reuters on
behalf of the Briti sh Bankers Association (BBA)after 11:00 AM (and
generally around 11:45 AM) each day (London time). LIBOR is
calculated by BBAdaily wherein they survey variety of banks that
represent the general market. The BBA then surveysdifferent banks
interbank in terest rate quotes. The rate at which each bank
submits must be formedfrom that banks perception of its cost of
funds in the interbank market. The top and bottom values of
the quotes are discarded and the remaining interest rate quotes
are averaged to form the daily LIBOR.LIBOR rates are provided for
period up to 12 months. LIBOR rates are provided in 10 currencies
namelyUS dollar , euro , Japanese yen , Swiss franc , Canadian
dollar , Australian dollar, Swedish Krona , Danishkrone , New
Zealand Dollar. There are ten LIBOR panels, one for each of the ten
currencies for which therate is determined. Each panel is composed
of at least eight contributor banks, chosen for theirreputations
and their perceived expertise in a given currency.
Why is Libor significant?
Not only does LIBOR provide information about the cost of
borrowing in different currencies, it actuallyinfluences it. Banks
look at it every day to figure out what they should charge for not
just home loans,but car loans, commercial loans, credit cards.
LIBOR ends up almost everywhere. variable interest rateloans such
as mortgages and car loans will often be quotes at LIBOR + a
percentage. For example, a loanthat was LIBOR + 5% would charge 10%
interest when the LIBOR is 5%, and 7% when the LIBOR is
2%.Soliterally hundreds of trillions of dollars around the world,
all these deals, are based on this number.
What is the Libor scandal?
Libor scandal was precipitated over the allegations that during
2008 sub-prime crisis, in order tostimulate the economic activity
and show rosier than actual picture of banks, banks showed lower
thanactual interest rates. The lower interest rates therefore
resulted in lower LIBOR and thus shored up the
confidence. Allegations of Libor rigging are not new but for the
first time it has come to the surface thatLIBOR manipulations were
sanctified by the officials. As Libor is the average of the
interest quotes bydifferent banks , so rigging of Libor involved
many banks. In the wake of investigation over the phoneconversation
Diamond had with Paul Tucker, the Deputy governor of bank of
England, Barclays decidedto come clean about Libor fixing and
settle ahead of the other banks who were also under
investigation.They launched an internal investigation which cost
100 million pounds and in its report to regulatorsclaimed that they
had official sanction to lower the interest rates. But their
strategy backfired with
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