LIBOR Scandal

DEFINITION of 'LIBOR Scandal'

A scandal 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 information on the interest rates they would use to calculate LIBOR. Evidence suggests that this collusion had been active since at least 2005.

BREAKING DOWN 'LIBOR Scandal'

LIBOR is an important interest rate when it comes to global finance. It is used to determine the price that businesses pay for loans and individuals pay for mortgages, and is also used in derivative pricing. The rate is supposed to represent the interest rate that a bank pays to borrow from another bank. The scandal involved banks understating the interest rate, which in aggregate, could keep the LIBOR rate artificially low.

LIBOR is also used as an indicator of a bank’s health, and the manipulation of the rate leading up to the 2007-2008 financial crisis made some financial institutions appear stronger than they actually were.

The brashness of bankers involved in the scandal became evident as emails and phone records were released during investigations. Evidence showed traders openly asking others to set rates at a specific amount so that a position would be profitable. Regulators in both the United States and United Kingdom levied millions of dollars in fines on banks involved in the scandal. Because LIBOR is used in the pricing of many financial instruments, corporations and governments have also filed lawsuits alleging that the rate fixing negatively affected them.

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