The LIBOR Scandal
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A step-by-step guide covering Python, SQL, analytics, and finance applications.
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The London Inter-bank Offer Rate (LIBOR), as we know, is the average cost of borrowing at which the Britain's banks lend money to each other. The LIBOR is calculated daily based on the information provided by these banks.
The London Interbank Offered Rate (“LIBOR”) and the Euro Interbank Offered Rate (“EURIBOR”) are benchmark reference rates fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.
The integrity of benchmark reference rates such as LIBOR and EURIBOR is therefore of fundamental importance to both UK and international financial markets.
Recently Barclays bank has come under investigation for manipulating the LIBOR. Barclays has accepted the claims of submitting artificially low estimates of its borrowing costs, in order to appear more competitive among the peers.
Liquidity issues were a particular focus for Barclays and other banks during the financial crisis and banks’ LIBOR submissions were seen by some commentators as a measure of their ability to raise funds. Barclays was identified in the media as having higher LIBOR submissions than other contributing banks at the outset of the financial crisis. Barclays believed that other banks were making LIBOR submissions that were too low and did not reflect market conditions.
Senior management’s concerns in turn resulted in instructions being given by less senior managers at Barclays to reduce LIBOR submissions in order to avoid negative media comment.
A lower submission would give a healthier picture of the bank's credit quality and it's ability to raise funds. It would also deflect any concerns of liquidity problems. Barclays has been fined £290m for this Libor-fixing scandal.
The investigation is going on for a dozen other banks including Citigroup, HSBC, UBS, and RBS.
The following document provides a detailed account of the charges against Barclays, and how and why it manipulated LIBOR from 2007 onwards.
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