---->LIBOR Scam
The Libor scandal is a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) which the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks in London. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were. Libor underpins approximately $350 trillion in derivatives. It is controlled by the British Bankers' Association (BBA).
The banks are supposed to submit the actual interest rates they are paying, or would expect to pay, for borrowing from other banks. The Libor is supposed to be an overall assessment of the health of the financial system because if the banks being polled feel confident about the state of things, they report a low number and if the member banks feel a low degree of confidence in the financial system, they report a higher interest rate number.
What is Libor? Libor is short for the London Interbank Offered Rate, a measure of the cost of borrowing between banks and a crucial benchmark for interest rates worldwide. It's actually a collection of rates generated for 10 currencies across 15 different time periods, ranging from one day to one year.
Libor rates are set each business day through a process overseen by the British Bankers' Association.
Between seven and 18 large banks are asked what interest rate they would have to pay to borrow money for a certain period of time and in a certain currency. The responses are collected by Thomson Reuters, which removes a certain percentage of the highest and lowest figures before calculating the averages and creating the Libor quotes.
Interbank rates are measured elsewhere in the world through similar processes. For example, there's also Japan's Tokyo Interbank Offered Rate, or Tibor, and the Belgium-based Euro Interbank Offered Rate, or Euribor.
How does it affect consumers? Libor is the world's most important benchmark for interest rates. Roughly $10 trillion in loans -- including credit card rates, car loans, student loans and adjustable-rate mortgages -- as well as some $350 trillion in derivatives are tied to Libor.
If Libor goes up, your monthly interest rate payments may go up with it. If it goes down, some borrowers will enjoy lower interest rates, but mutual funds and pensions with investments in Libor-based securities will earn less in interest.
How big is the scandal? "This dwarfs by orders of magnitude any financial scams in the history of markets," said Andrew Lo, a professor of finance at the Massachusetts Institute of Technology.
Given Libor's vast reach and the number of global firms that may be involved in its manipulation, the scandal is prompting calls for resignations, criminal prosecutions, and stricter regulation of the financial sector.
Barclays CEO Bob Diamond and chief operating officer Jerry del Missier announced their resignations on Tuesday, following chairman Marcus Agius's announcement a day prior. The bank has been hammered by politicians in the U.K. including Prime Minister David Cameron, who called its actions "a scandal" and "extremely serious."
The Libor scandal is a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) which the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks in London. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were. Libor underpins approximately $350 trillion in derivatives. It is controlled by the British Bankers' Association (BBA).
The banks are supposed to submit the actual interest rates they are paying, or would expect to pay, for borrowing from other banks. The Libor is supposed to be an overall assessment of the health of the financial system because if the banks being polled feel confident about the state of things, they report a low number and if the member banks feel a low degree of confidence in the financial system, they report a higher interest rate number.
What is Libor? Libor is short for the London Interbank Offered Rate, a measure of the cost of borrowing between banks and a crucial benchmark for interest rates worldwide. It's actually a collection of rates generated for 10 currencies across 15 different time periods, ranging from one day to one year.
Libor rates are set each business day through a process overseen by the British Bankers' Association.
Between seven and 18 large banks are asked what interest rate they would have to pay to borrow money for a certain period of time and in a certain currency. The responses are collected by Thomson Reuters, which removes a certain percentage of the highest and lowest figures before calculating the averages and creating the Libor quotes.
Interbank rates are measured elsewhere in the world through similar processes. For example, there's also Japan's Tokyo Interbank Offered Rate, or Tibor, and the Belgium-based Euro Interbank Offered Rate, or Euribor.
How does it affect consumers? Libor is the world's most important benchmark for interest rates. Roughly $10 trillion in loans -- including credit card rates, car loans, student loans and adjustable-rate mortgages -- as well as some $350 trillion in derivatives are tied to Libor.
If Libor goes up, your monthly interest rate payments may go up with it. If it goes down, some borrowers will enjoy lower interest rates, but mutual funds and pensions with investments in Libor-based securities will earn less in interest.
How big is the scandal? "This dwarfs by orders of magnitude any financial scams in the history of markets," said Andrew Lo, a professor of finance at the Massachusetts Institute of Technology.
Given Libor's vast reach and the number of global firms that may be involved in its manipulation, the scandal is prompting calls for resignations, criminal prosecutions, and stricter regulation of the financial sector.
Barclays CEO Bob Diamond and chief operating officer Jerry del Missier announced their resignations on Tuesday, following chairman Marcus Agius's announcement a day prior. The bank has been hammered by politicians in the U.K. including Prime Minister David Cameron, who called its actions "a scandal" and "extremely serious."
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