LIBOR or LIEBOR?

The recent London Interbank Offered Rate ( LIBOR) scandal has cost Barclays heavily with its top 3 officials including the CEO Bob Diamond resigning from the firm. Before digging into the LIBOR scandal, let us first get an insight into what LIBOR is all about. What is Libor? LIBOR, or the London Interbank Offered Rate, is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks in the London interbank market. Libor is calculated and published by Thomson Reuters on behalf of the British Bankers Association (BBA) after 11:00 AM (and generally around 11:45 AM) each day (London time). LIBOR is calculated by BBA daily wherein they survey variety of banks that represent the general market. The BBA then surveys different banks interbank interest rate quotes. The rate at which each bank submits must be formed from that banks perception of its cost of funds in the interbank market. The top and bottom values of the quotes are discarded and the remaining interest rate quotes are averaged to form the daily LIBOR. LIBOR rates are provided for period up to 12 months. LIBOR rates are provided in 10 currencies namely US dollar , euro , Japanese yen , Swiss franc , Canadian dollar , Australian dollar, Swedish Krona , Danish krone , New Zealand Dollar. There are ten LIBOR panels, one for each of the ten currencies for which the rate is determined. Each panel is composed of at least eight contributor banks, chosen for their reputations and their perceived expertise in a given currency. Why is Libor significant? Not only does LIBOR provide information about the cost of borrowing in different currencies, it actually influences it. Banks look at it every day to figure out what they should charge for not just home loans, but car loans, commercial loans, credit cards. LIBOR ends up almost everywhere. variable interest rate loans such as mortgages and car loans will often be quotes at LIBOR + a percentage. For example, a loan that was LIBOR + 5% would charge 10% interest when the LIBOR is 5%, and 7% when the LIBOR is 2%.So literally hundreds of trillions of dollars around the world, all these deals, are based on this number. What is the Libor scandal? Libor scandal was precipitated over the allegations that during 2008 sub-prime crisis, in order to stimulate the economic activity and show rosier than actual picture of banks, banks showed lower than actual interest rates. The lower interest rates therefore resulted in lower LIBOR and thus shored up the confidence. Allegations of Libor rigging are not new but for the first time it has come to the surface that LIBOR manipulations were sanctified by the officials. As Libor is the average of the interest quotes by different banks , so rigging of Libor involved many banks. In the wake of investigation over the phone conversation Diamond had with Paul Tucker, the Deputy governor of bank of England, Barclays decided to come clean about Libor fixing and settle ahead of the other banks who were also under investigation. They launched an internal investigation which cost 100 million pounds and in its report to regulators claimed that they had official sanction to lower the interest rates. But their strategy backfired with

politicians and regulators quickly turning against the bank as public outrage rose and were fined $455 million by US regulators for rigging the Libor rates. Not only this , the top 3 officials of Barclays had to bear the brunt by resigning from their respective jobs.