Treasury Committee’s Views on Libor

18 08 2012

London Interbank Offered Rate (Libor) is an average interest rate set by the British Bankers’ Association (BBA). Libor, a benchmark interest rate which the international financial system is wholly dependent, is calculated on the basis of submissions of interest rates by major banks in London and – underpinning approximately US $350 trillion in derivatives – serves as the foundation of global banking and finance. Traders claim that Libor has been manipulated since 1991. Of late, the issue has become a huge scandal because banks either understated or exaggerated (“rigged”) Libor to cast false impressions regarding their creditworthiness or to profit from trades.

The problem was that, rather than overstating or understating figures, banks were required to submit the real/actual rates they were paying or would genuinely pay for borrowing from other banks. Ultimately, an attempt to manipulate Libor violates US law as the rate is widely used in American derivative markets. Moreover, adverse consequences in “fixing” Libor exist for consumers and international markets alike. From Britain’s position, in an economically deteriorating environment, the embarrassment could not have been more unfortunate because Libor is a “London” based exchange rate. Read the rest of this entry »