What is LIBOR and why does it matter?
LIBOR, or the London Interbank Offered Rate, is the average interest rate at various maturities at which global banks borrow funds from other banks. LIBOR is calculated by Thompson Reuters in London using interest rate estimates submitted by traders at leading banks. Over $360 trillion of assets globally are indexed to LIBOR.
What is the allegation regarding bank manipulation of LIBOR?
Barclays Bank has been fined $450 million by U.S. and U.K. regulators for intentionally submitting false rates to manipulate LIBOR for its own gain. Barclays submitted deceitful rates to increase profit in their derivatives portfolio and to appear more financially sound. There is an emerging contention that the LIBOR manipulation was tacitly endorsed by government regulators.
What are the potential future implications of the scandal?
Regulators in the US, UK, EU, Japan, Canada, Switzerland, and others are investigating the possibility that LIBOR has been manipulated by other large, multinatioal banks. While some have suggested there will be a wave of ligation against the banks, it’s very difficult to tell if this actually harmed borrowers. This scandal ensures that more investigations and shaken confidence will persist in an already fragile financial sector.