The Libor fixing scandal

libor-fixingThe scandal which rocked the financial markets around the globe known as the LIBOR fixing scandal has done much to undermine the already low public view of traders and banks operating on financial markets across Europe and many other areas of the world. The LIBOR scandal centers on the fixing of exchange rates used to secure funds for banks and financial institutions in London and across Europe. A far reaching scandal, the London Interbank Offered Rate reports the average level of interest banks offer unsecured loans to each other every day. Small changes to the LIBOR and its European relative, EURIBOR, cause widespread changes to occur in interest rates charged for consumer and commercial loans taken out daily.

Before examining the scandal it is important to understand how the LIBOR works and what effects it has on global finance. The LIBOR is basically the average rate at what banks in London lend each other money without asking for securities of any kind, each day London based banks submit their interest rates for lending, for publishing and to determining the average lending rate known as the LIBOR. To calculate the LIBOR, data collectors Thomson Reuters remove the highest and lowest rates from the calculation before calculating the average lending rate from the middle 50 percent of those reported by London banks. When this calculation is published the worlds banks and financial institutions use the LIBOR as the basis for determining interest rates for lenders at all levels.

Although the LIBOR fixing scandal only came to light in 2012, the basis of the scandal reaches back to 2005, when traders at the British based Barclays Bank began to manipulate the LIBOR rate to increase the profitability of their trades. Between 2005 and 2007, traders at Barclays Bank regularly requested a specific rate of lending by the bank to be reported to increase their profit margins, instead of the true lending rate being published. A number of other financial institutions and trading companies quickly followed suit, with a total number of LIBOR and EURIBOR fixing requests totaling 257 being reported between June 2005 and June 2009. As early as 2007, US regulators report receiving information about unrealistically low rates being reported on the LIBOR, warnings that appear to have been initially ignored in a bullish financial market.

With the 2008 global economic downturn the LIBOR fixing scandal took a distinct turn, which led to the interest rates reported by Barclays being fixed to increase consumer confidence and limit the effects of problems with the global economy. During the economic downturn Barclays managed to appear financially healthy despite concerns about vast losses by the company on the financial markets, largely because of the LIBOR fixing the bank undertook.

Barclays was not the only bank to be embroiled in the scandal. Thomas Hayes, a trader with UBS was arrested in 2012. Hayes is reported to have manipulated the LIBOR and EURIBOR to make hundreds of millions of dollars of profit for UBS and earn himself large bonuses. Regulators across the world have now investigated and continue to look into fixing of Interbank lending reports in the US, UK, Japan, Canada and in the European Union. To date around $6 billion in fines have been handed out to financial institutions and trading companies, including a $453 million fine paid by Barclays for its role in fixing the LIBOR.

Other companies that have been fined for their part in fixing the LIBOR and EURIBOR include UBS, Deutsche Bank, JP Morgan and RBS, which has a controlling interest held by the UK taxpayer. Criminal charges have been brought against a number of traders and bank officials, with the chairman of Barclays being forced to resign because of the LIBOR fixing scandal.