The LIBOR Scandal was a highly-publicized scheme in which bankers at several major financial institutions colluded with each other to manipulate the London Interbank Offered Rate (LIBOR). The scandal sowed distrust in the financial industry and led to a wave of fines, lawsuits, and regulatory actions. Although the scandal came to light in 2012, there is evidence suggesting that the collusion in question had been ongoing since as early as 2003.
Many leading financial institutions were implicated in the scandal, including Deutsche Bank, Barclays, Citigroup, JPMorgan Chase, and the Royal Bank of Scotland.
As a result of the rate-fixing scandal, questions around LIBOR’s validity as a credible benchmark rate have arisen, and it is now being phased out. According to the Federal Reserve and regulators in the U.K., LIBOR will be phased out by June 30, 2023, and will be replaced by the Secured Overnight Financing Rate (SOFR). As part of this phase-out, LIBOR’s one-week and two-month USD LIBOR rates will no longer be published after December 31, 2021.
Key Takeaways
- The LIBOR Scandal: A major episode of financial collusion wherein one of the world’s most influential benchmark interest rates was manipulated by various banks.
- Impact: The scheme caused financial contracts to be mispriced throughout the world, affecting mortgages, corporate fundraising, and derivative trades.
- Aftermath: Regulatory changes, lawsuits, and fines ensued, damaging public trust in the financial markets.
Understanding the LIBOR Scandal
The LIBOR is a benchmark interest rate used for the pricing of loans and derivative products worldwide. It is formed using reference interest rates submitted by participating banks. During the LIBOR Scandal, traders at many of these banks deliberately submitted artificially low or high interest rates to manipulate the LIBOR higher or lower, in an effort to support their own institutions’ derivative and trading activities.
The significance of the LIBOR scandal lies in the central role LIBOR plays in global finance. LIBOR determines everything from the interest rates giant corporations pay for loans to the rates consumers pay for home mortgages or student loans. By manipulating the LIBOR, the traders indirectly caused a cascade of mispriced financial assets throughout the entire global financial system. This led to substantial public backlash, as parties worldwide wondered whether they had been financially harmed.
Public outrage escalated as evidence from emails and phone records revealed the brashness of the actors involved. Traders were openly requesting others to set rates at specific amounts to profit from particular positions. Regulators in both the United States and the United Kingdom levied around $9 billion in fines on participating banks, accompanied by criminal charges. Since corporations and governments also utilize LIBOR in pricing various financial instruments, many filed lawsuits alleging that rate-fixing negatively impacted them.
Illustrative Example of the LIBOR Scandal
While pinpointing individual financial impact from the LIBOR scandal is challenging, various potential scenarios illustrate its reach. For instance, individual homeowners might have initiated fixed-rate mortgages during times when mortgage rates were artificially elevated based on upward manipulation of the LIBOR. To the homeowner, every additional dollar from these rates could be viewed as
Related Terms: London Interbank Offered Rate, Secured Overnight Financing Rate, Financial Conduct Authority, derivatives, mortgage rates
References
- The Intercontinental Exchange. “LIBOR”.
