DEFINITION of The 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 information on the interest rates they would use to calculate LIBOR. 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, JPMorgan Chase, the Bank of Tokyo Mitsubishi, Credit Suisse, Lloyds, WestLB, and the Royal Bank of Scotland were notable in the scandal, among others.

BREAKING DOWN The LIBOR Scandal

The LIBOR scandal was significant due to the role the LIBOR plays internationally. 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. In aggregate the LIBOR underpins ~$300 trillion of loans, globally. It 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 LIBOR Scandal: The Details

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 ~$9 billion of dollars in fines on banks involved in the scandal, as well as a slew of criminal charges. 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.

Policy Shifts After the LIBOR Scandal

Following the unveiling of the LIBOR collusion, Britain’s Financial Conduct Authority (FCA) removed LIBOR supervision from the British Bankers’ Association (BBA) and delivered it to the ICE Benchmark Administration (IBA). The IBA is an independent UK subsidiary of the private U.S.-based exchange operator Intercontinental Exchange (ICE). LIBOR is now commonly known as LIBOR ICE. This shift been significant in restoring its credibility and integrity.