What’s Libor?

Libor stands for “London InterBank Offered Rate,” and it’s exactly what it says on the tin. Banks lend each other money all the time. Sometimes overnight just to close their books with enough cash, sometimes for a week or two, and sometimes for a year. It’s not that banks don’t have money, it’s just that the money they have are tied in assets like stocks, bonds, and derivatives, and there’s a minimum amount of cash they are legally required to hold on their balance at close of business. So they exchange currencies.

Each morning, 18 banks tell the British Bankers’ Association (the U.K.’s bank lobby) how much they think other banks will charge them for borrowing their money today: that’s an interest rate. There is a rate for 15 borrowing periods (from one day to 12 months) and 10 different currencies. The BBA compiles it all, eliminates the four highest and four lowest rates, then publishes a median for each of the maturities and each of the currencies.

What matters is that it is an honor system: the BBA is not an independent organization, and they trust the banks to tell the truth. There isn’t an existing mechanism to review or regulate what they say. Also, it is an estimate, not a report of how much it actually cost a bank to borrow money on any given day.

Why should it concern you?

If banks lied about the rates at which they borrow, your home could be costing you a lot more than it would in a clean system. If your country or your city bought financial products in the past decade, your taxes could be misspent. Libor is a benchmark for short-term interest rates. It is used as a reference for a $360-trillion worldwide securities market that includes loans and mortgages. At these levels, even slight variations in the rates reported could have huge repercussions. In short, it would be fraud on a global scale.

Did banks lie?

It looks that way. U.K. bank Barclays was the first to get in trouble, mostly because it was the only one willing to fully cooperate with the British authorities. All of the “submitters” (or banks that submit their rates to the BBA) may have participated in rate-rigging. And what is worse, some have suggested that from the beginning of the financial crisis in 2007-2008, regulators may have been encouraging banks to report low rates. Low rates mean low risk: this would’ve been done to keep the markets in the dark about the financial health of the submitters and protect their reputation as safe borrowers. It’s not crazy to think that at the height of the crisis, regulators would’ve done anything to keep fear in the markets at a minimum. These things run on confidence.

The fact is, both the U.S. Federal Reserve and the Bank of England knew about the problem since 2007 and 2008. U.S. Treasury Secretary Tim Geithner, then head of the New York Fed and in charge of looking into it, faced the Senate on July 25, 2012, evading questions about his own role in the scandal and promising to pursue criminal charges.

The practice of rate-fixing seems to have started long before all that, however. Documents going as far as 2005 have come up in the British parliamentary inquiry. Before the crisis, artificially raising rates would’ve also increased trading gains. And suspicion is that this may have also happened with Euribor (the same thing, but compiled in Brussels) and Tibor (in Tokyo). Some think we’ll soon find out it was endemic.

Why would they do that?

Because they could. Remember how it’s an honor system? Manipulating rates is very easy to do, as there is no way to supervise submissions. Also, Libor didn’t attract much attention before the crisis. When things were going well, only people in the know paid it any mind. As the financial world neared collapse and interbank lending ground to a halt, Libor became a vital indicator, mostly to those who followed markets closely. The feeling of impunity was such submitters were quite open about it, carelessly documenting their rate-rigging activities in e-mails and documents.

Now what?

U.S. authorities are involved. Cities like Baltimore are suing, the Justice Department is also building a case and more recently, prosecutors in New York and Connecticut followed suit. The investigation extended to Euribor, the European Union’s equivalent. All submitting banks are being examined closely and individuals are likely to be charged in Britain and in the U.S. The U.K.’s Financial Service Authority wants to reform the way the benchmark rate is set, making its manipulation a crime. In fact, the BBA may lose the oversight of the rate. Three people were arrested in London on Dec. 11, 2012, and in the U.S., a settlement with Swiss bank UBS includes charges against individuals.

Related Stories


The U.S. will bring charges against several bankers at Swiss bank UBS involved with the manipulation of the Tokyo Interbank Offered Rate (Tibor). These would be the first charges filed by the U.S. Department of Justice against individuals in the benchmark rate-rigging scandal that involves the London Interbank Offered Rate and its Japanese and European equivalents. The news comes a day after it was leaked that UBS will probably pay a fine over $1 billion dollars to the U.S. and the U.K. authorities to settle an investigation into its role in the Libor-rigging scandal. (Dec. 14, 2012)


The Swiss bank UBS is said to be in the final stages of negotiating a settlement with the U.S. and U.K. regulators in which it will pay over $1 billion in fines over its role in the rigging of the London Interbank Offered Rate, or Libor. The bank, which was the first to announce last year it was under investigation, is also being probed by the Swiss authorities, and the inquiry also covers potential rigging of Euribor, Libor’s equivalent in Brussels. The numbers aren’t finalized and the deal could be announced next week, but if confirmed, the amount is more than double what Barclays paid for similar charges. Bloomberg reports that secret transcripts from the Royal Bank of Scotland show the conspiracy to manipulate the rate went as high as senior managers. Libor, a benchmark rate, underpins $350 trillion in financial products globally, including mortgages and student loans. (Dec. 13, 2012)


Bank of Canada Governor Mark Carney will be the next Bank of England (BOE) governor, the first foreigner named to this post in the central bank’s 318 years of existence. Carney, a 47-year-old former Goldman Sachs managing director, will replace present BOE Governor  Mervyn King. Untainted by the problems and scandals brought to light by the financial crisis, he will run the central bank just as it acquires new powers to oversee the banking sector in the U.K. The news came after the demise of Paul Tucker, long thought to be the one to take over from King, after his alleged involvement in the Libor rigging scandal. Details of a 2008 telephone call he had with Robert Diamond, then the head of the investment banking arm of Barclays, were taken by U.K. lawmakers as proof he pushed the bank to artificially lower its rates. He also failed to act on calls to reform the way the interbank lending rate was calculated. Carney’s country of origin is part of the Commonwealth of Nations, and Queen Elizabeth II is also Canada’s constitutional monarch. (Nov. 26, 2012)


Financial Services Authority (FSA) Managing Director Martin Wheatley said today in London those guilty of manipulating Libor should be jailed. Wheatley presented a set of proposals to reform the way the benchmark interest rate is set that could become law by early 2013, according to U.K. Treasury Financial Secretary Greg Clark. The rigging scandal surrounding the London interbank offered rate, which underpins over $300 trillion in assets worldwide, resulted in a £290 million ($468 million) fine for Barclays in June and prompted the authorities to investigate all submitting banks. Wheatley’s proposals include reducing the number of Libor benchmarks, which exist in 15 maturities (overnight to 12 months) for 10 different currencies. The FSA suggests focusing on four periods for a maximum of five different currencies. Wheatley also asked for more banks to be included in the submitting process. To avoid a repeat of 2008-2009, when submitters artificially lowered the rate to make it look like their banks were in good financial health, Wheatley proposed that submitters wait three months before making their rates public. The numbers submitted will rely on actual transactions rather than estimates. The FSA would also become responsible for vetting submitting banks, all of which would sign a code of conduct. Wheatley will become the chief of the Financial Conduct Authority as the FSA splits into two agencies. (Sept. 28, 2012)


The British Bankers’ Association (BBA), the U.K.’s bank lobby group, may lose oversight of Libor, the interest rate that serves as a benchmark to $360 trillion in financial tools worldwide. This is according to someone close to the investigation led by the Financial Services Authority (FSA), the nation’s banking regulator. Lack of supervision made it possible for Libor to be rigged by employees at some of the submitting banks, either to favor their traders’ positions or to obscure the financial health of the banks. The misconduct went on between 2005 and at least 2009, evidence has shown. FSA Managing Director Martin Wheatley, who has been tasked with reforming the way Libor is set, will announce his proposals on Friday. The BBA said in a statement today it is prepared to step aside should new oversight of the interest rate be advised: “[If] Mr Wheatley’s recommendations include a change of responsibility for LIBOR, the BBA will support that.” So far, only Barclays bank has been fined for its involvement, but today, new reports showed managers at Royal Bank of Scotland condoned and took part in the manipulation of the rate. (Sept. 25, 2012)


The U.K.’s Financial Service Authority is looking to reform the way Libor is set and make its manipulation a criminal offense. FSA Senior Executive Martin Wheatley will work with the European Union and lead a month-long consultation, looking not only into interest rates, but also other unregulated markets. British bank Barclays, the first bank to be investigated about Libor, named Sir David Walker as its new chairman after Marcus Agius resigned in the wake of the scandal. Former Barclays trader Ryan Reich cooperated with the U.S. authorities, Reuters reported. Reich was fired in 2010 for having sent emails inquiring about the pricing of Libor, which could’ve helped his trading and is now working for hedge fund WCG Management. He could be a key witness for federal prosecutors. (Aug. 10, 2012)


Britain’s Royal Bank of Scotland lost £1.99 billion ($3.09 billion) in the first half of the year. The bank, which became 82 percent owned by the British government after a bailout, set £260 million ($406 million) aside to compensate its customers for a computer bug in June as well as inappropriate insurance selling. It also confirmed that it sacked four employees over their involvement in the Libor scandal. RBS Chief Executive Officer Stephen Hester admitted that the banking industry’s reputation had hit “new lows,” saying this was in a “chastening period.” (Aug. 3, 2012)


Britain’s Serious Fraud Office, who opened an investigation into Libor-rigging on July 6, says it is coming closer to charging individuals at several banks who were involved in manipulating the benchmark rate. So far, only Barclays was fined, although the Royal Bank of Scotland said it is trying to work out a settlement with the authorities. Germany’s largest bank Deutsche Bank also admitted to being a part of the scandal, and said it had already taken action against the “limited number” of individuals concerned. (Jul. 31, 2012)


After Libor, its Brussels equivalent is now under scrutiny. Four more banks who submit to Euribor are now being suspected of collusion. Traders at Crédit Agricole, Société Générale, HSBC, and Deutsche Bank are thought to have collaborated with their counterparts at Barclays, pushing the rate up or down to boost trading gains. A panel of 43 banks from Europe, the U.S., and Japan submit their rates every day to the European Banking Federation, Europe’s banking lobby. Much like Libor, Euribor is a median of all the rates compiled, calculated by removing the top and bottom 15 percent. Yesterday and Tuesday, Federal Reserve Chairman Ben Bernanke faced questions from senators and representatives about the reasons why the Fed didn’t do more to end Libor-rigging when it was informed of the practice in 2008. Central bankers will meet in September to decide whether to reform Libor or scrap it altogether. (Jul. 19, 2012)