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LIBOR Scandal

Definition

The LIBOR scandal refers to a fraudulent scheme in which large banks manipulated the London Interbank Offered Rate (LIBOR), a benchmark interest rate used in worldwide financial markets to regulate the terms of loans and derivatives. These manipulations, which occurred primarily during the 2008 financial crisis, resulted in distorted borrowing costs internationally. The scandal highlighted deep flaws in the financial industry’s self-regulation practices, leading to significant legal consequences for the banks involved.

Phonetic

The phonetic spelling of “LIBOR scandal” is “ˈlaɪbɔːr ˈskændəl”.

Key Takeaways

  1. Manipulation of Benchmark Interest Rates: The LIBOR scandal revolved around banks manipulating one of the most essential benchmark interest rates in the global economy, the London Interbank Offered Rate (LIBOR). Libor sets daily average rates at which banks are willing to lend to each other. It was discovered that banks were falsely inflating or deflating their rates to profit from trades, or to give a false impression of their financial health.
  2. Widespread Impact: The scandal had a broad impact as LIBOR is used to determine the interest rates for a large number of financial instruments and products globally. It is estimated to affect around $350 trillion worth of derivatives. Any manipulation of the LIBOR rate can adversely affect financial markets worldwide with a significant cost to consumers and investors.
  3. Regulatory Fines and Reforms: The LIBOR scandal led to the imposition of billions of dollars in fines by regulators around the world to numerous banks including Barclays, UBS, and Deutsche Bank. It also initiated reforms in the way key financial benchmarks are set and accelerated changes towards more accurate and reliable benchmarks.

Importance

The LIBOR scandal is significant because it exposed major flaws and manipulations within the international banking system. LIBOR, or London Interbank Offered Rate, is a benchmark interest rate used globally to price trillions of dollars of financial products, from mortgages to complex derivatives. In 2012, it was discovered that several banks were fraudulently inflating or deflating their rates to profit from trades or to give the illusion of a more creditworthy institution. This scandal shook trust in the banking system, led to billions of dollars in fines for involved banks and spurred large-scale regulatory changes. It broadened the conversation around financial ethics, representation, and regulatory oversight. It also highlighted the systemic risk posed by data manipulation within financial frameworks.

Explanation

The LIBOR (London Interbank Offered Rate) scandal, uncovered in 2012, was a financial scheme in which several prominent banks manipulated the LIBOR to their advantage. The LIBOR is a benchmark interest rate used globally to determine the charges on various forms of borrowing, such as loans and derivatives. It serves as a barometer of the health of the global financial system and a reference point for approximately $350 trillion in contracts worldwide. Therefore, inaccurate LIBOR figures can influence both the prices of financial transactions and the financial stability of individual consumers, institutions, and countries.The essence of the LIBOR scandal was that banks were dishonestly submitting low borrowing estimates to give a false impression of their financial health. In doing this, they aimed to raise or lower interest rates to gain profits on trades, or to give an artificially inflated image of their creditworthiness. This manipulation constituted a major breach of trust and triggered a series of regulatory reactions globally. The repercussions of the scandal were widespread, affecting a range of financial instruments and contracts, and highlighting the urgent need for improvements in banking regulation and governance worldwide.

Examples

1. Barclays Bank LIBOR Scandal 2012: The first company that came under the global spotlight due to the LIBOR scandal was Barclays Bank in 2012. The UK-based bank was found to have manipulated the LIBOR to increase profits and give a false impression of its creditworthiness between 2005 and 2009. The bank admitted to the fraud and agreed to pay penalties of around £290 million to US and UK regulators.2. UBS LIBOR Scandal 2012: Swiss bank UBS was also found guilty of engaging in deceptive LIBOR manipulation practices. In 2012, the bank settled with regulators and agreed to pay a staggering $1.5 billion in fines. Investigations showed that over 40 employees at the bank were involved in the rate-rigging process that allegedly took place from 2002 until late 2007.3. Deutsche Bank LIBOR Scandal 2015: Deutsche Bank was involved in a serious case of LIBOR rate manipulation from 2005 to 2011. In 2015, as a result of joint investigations by financial regulatory bodies including the US Department of Justice, the bank was penalized with a record-breaking fine of $2.5 billion. It was revealed that traders routinely manipulated submissions to benefit their own trading positions.

Frequently Asked Questions(FAQ)

What is the LIBOR scandal?

The LIBOR (London Interbank Offered Rate) scandal was a financial scandal, in which financial institutions were accused of fixing the LIBOR, an average interest rate calculated through submissions of interest rates by major banks in London that is used worldwide as a benchmark rate.

When did the LIBOR scandal happen?

The LIBOR scandal was uncovered in 2012. However, it is believed that the manipulation of the rates was happening years before it came to light.

Which banks were involved in the LIBOR scandal?

Several global banks were implicated in the scandal, including Barclays, the Royal Bank of Scotland, UBS, Citigroup, and Deutsche Bank, among others.

What was the impact of the LIBOR scandal?

The scandal had a significant impact on the trust towards the banking sector, leading to major reforms on how LIBOR rates are set. It also resulted in billions of dollars in fines for the involved banks.

How was the LIBOR rate manipulated?

The banks manipulated the LIBOR rate by falsely inflating or deflating their rates to profit from trades, or to give the impression that they were more creditworthy than they were.

What actions were taken against the banks involved in the LIBOR scandal?

The banks involved in the scandal faced huge fines, with some of the banks paying billions in settlements. There have also been individual convictions of traders and brokers.

Are there new regulations in place to prevent a similar scandal?

Yes, following the scandal, several reforms have been put in place. The process of setting the LIBOR has been revised, and it is now regulated by financial authorities. Also, there has been a push towards using alternative reference rates that are less susceptible to manipulation.

Is the LIBOR still in use today?

Yes, but it is being phased out progressively. The FCA, the regulator of LIBOR, announced that most LIBOR rates will cease to be published by end of 2021. They will be replaced by more reliable rates such as the Secured Overnight Financing Rate (SOFR) in the US.

Related Finance Terms

  • Interest Rate Manipulation
  • Financial Fraud
  • Banking Institutions
  • Regulatory Investigations
  • Global Financial Crisis

Sources for More Information

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