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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RELATED FAQS
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    Discover what happened with the LIBOR scandal, uncovered in 2012, why it was important, and proposals to prevent it from ... Read Answer >>
  2. How did LIBOR come into use?

    Learn about the significance of the London Interbank Offered Rate, or LIBOR, and the history of how the daily LIBOR became ... Read Answer >>
  3. How did the LIBOR scandal affect interest rate swaps?

    Find out how the LIBOR scandal directly enriched some interest rate swap traders and harmed others by understating the real ... Read Answer >>
  4. Why is LIBOR sometimes referred to as LIBOR ICE?

    Learn what the LIBOR rate is, why there was a change in administration from BBA to IBA, and why LIBOR is often referred to ... Read Answer >>
  5. How is Libor determined?

    Libor is the major rate used to price debt stock. Libor is actually a set of several benchmarks that reflect the average ... Read Answer >>
  6. What is the difference between LIBOR, LIBID and LIMEAN?

    LIBOR, LIBID and LIMEAN are all reference rates used to benchmark short-term interest rates. The London Interbank Offered ... Read Answer >>
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