Libor Case

INTRODUCTION

LIBOR is referred to as London Inter-Bank Offered Rate and it is the worlds most used interest rate among international banks. It is significant as it is the rate that banks use to borrow short term funds from each other. This rate was first developed by The Bank of England and it came in use in 1985.

Over the last few years there has been numerous scandals that have brought the banking industries ethics into question and has decreased confidence in banks among consumers and businesses. These scandals that involve the world’s most known banks such as Barclays, Union Bank of Switzerland (UBS), The Royal Bank of Scotland (RBS) and so on.

These banks manipulated the rates in order to gain more profits and also to portray the banks image as strong banks. Each one of these banks were find some humongous amount of money for cheating the rates and were put to trials that lead to destroying their reputation.

This paper is going to explain to you how these banks set and manipulated their rate, also how they have damaged and affected other parts of the commercial sector that relay on the these rates.

THE PROCESS AND THE PURPOSE OF HOW BANKING INSTITUTIONS SET THEIR LIBOR RATES

Every day, Thomson Reuters, a multinational mass media company, who calculates the rates on behalf of British Banker’s Association (BBA)  publishes 8 rates that were submitted by 16 banks on which they are charged on to borrow money. The four lowest rates and the four highest rates are usually discounted and then the banks find the average of the eight remaining rates makes up the LIBOR rate. This means a bank has to pay a higher interest rate if other banks have less confidence in it. By increasing the numbers of banks who are involved in setting the LIBOR rate reduces the chances of unethical behaviour by banks like was seen in 2012 by Barclays.

“Barclays trades in these products, so in attempting to fix the LIBOR rate, they are rigging the market in its favour. As a result, they made bigger profits and traded at an advantage over others. But during the credit crunch, banks became concerned about lending to one another and the LIBOR rate rose significantly. The more likely a bank was to collapse, the higher the rate they were charged to borrow. Barclays Senior Management told staff to lie, saying that they could borrow at lower interest rates than they could, in order to show the bank in a better light than it actually was.” (Leading Britain’s Conversation: 2014).

This shows that Barclays was performing highly unethically and was misusing their position to manipulate the rates. Such an act changed the image of the banks for many in the general public and therefore have had to begin a rebuilding process in order to regain consumers trust.

These are the Active and inactive LIBOR currencies and maturities as of January 13, 2014.

[pic 1]

Figure 1: LIBOR currencies and maturity days,

ROLES OF LIBOR IN COMMERCIAL SECTOR

In the commercial sector LIBOR has two primary roles which are acting as a reference rate and also acting as a benchmark rate.