WHAT IS LIBOR ?
• The London Interbank Offered Rate is the average interest
rate estimated by leading banks in London that they would be
charged if borrowing from other banks.
• Libor rates are calculated for ten currencies and fifteen
borrowing periods ranging from overnight to one year and are
published daily at 11:30 am (London time) by Thomson
• Many financial institutions, mortgage lenders and credit card
agencies set their own rates relative to it. At least
$350 trillion in derivatives and other financial products are
tied to the Libor.
HOW IS IT CALCULATED?
• Each LIBOR rate is calculated using the “trimmed mean” of
the contributing banks’ submissions.
• Trimmed mean is calculated by discarding the top 25% and
bottom 25% of the submitted interest rates and then taking
an average of the remaining middle 50% (for example, if 18
banks submit rates for the 30-day U.S. dollar LIBOR rate, the
top 4 and bottom 4 submissions are discarded before an
average is taken of the middle 10 submissions)
• This calculation reduces the impact that any single
contributing bank can have on the final officially published
IMPORTANCE OF LIBOR
• Nearly $800 trillion in financial instruments—
including corporate debt, mortgages, student loans,
interest rate and other derivatives—reference LIBOR
in some form or other.
• LIBOR is often used as the base for variable-rate
• LIBOR has become the shorthand measure of stress
in global money markets.
• LIBOR rates are also used in many derivatives
How Libor Scandal became apparent
• The scandal arose when it was discovered that banks had falsely inflated or
deflated their rates—so as to make profits from Libor trading.
• False presentation of rates as the banks wanted to give the impression that they
were more credit worthy than they were in reality.
On 27 July 2012, The Financial Times published an article by a former trader that
Libor manipulation had been common since 1991. Reports on this have been
flashed on BBC, News Agency Reuters and other financial programs.
During the 2007-2012 global financial crisis the banks involved had artificially
lowered rate submissions to make their bank look healthy.
Two days later the UK Serious Fraud Office opened a criminal investigation into
manipulation of interest rates. The investigation was not limited to Barclays;
around 20 major banks have been named in investigations and court cases.
The CFTC (in mid-2008), the SEC (in 2009) and the DOJ (in 2010) opened
investigations into the manipulation of LIBOR.
Early Reports of Libor Manipulation
On 16th April 2008 – the Wall street Journal released a controversial article
suggesting that some banks might have understated borrowing costs they
reported for the Libor during 2008 credit crunch.
Two years later in April 2010, a study by economist , Snider and
Youle, corroborated the results of the Wall Street Journal. They argued that
banks did this because they sought to make substantial profits on their large
Libor interest-linked-Portfolios.ion of these banks
In 2009 the Citigroup reported that it would make $936 million in net interest
revenue if interest rates fall by .25% and that they would make $1935 million if
the interest rates fall by 1%.
The Governor and the deputy Governor of the Bank of England were aware
that because of industry concerns the Libor rate was being under-reported
Early Reports of Libor Manipulation
A trader from Royal Bank of Scotland claimed that it was a common practice
among senior employees of the bank to make requests to the bank’s rate
setters to appropriate Libor rate.
The Federal Reserve Bank of New York first received indications of inaccurate
LIBOR rates in the fall of 2007 as a part of its normal market intelligence
Canadian branches of Royal Bank of Scotland/HSBC/Deutsche Bank/JPMorgan
Bank/Citibank were involved in this.
On 27 June 2012—Barclay’s bank was the first to be fined $200 million by
Commodity Futures Trading Commission/ $160 million by the U.S. Department
of Justice – for attempting to manipulate Libor rates in 2007-12.
Did U.S. and U.K. regulators know about the
manipulation of LIBOR at the time it was
occurring, and what has their response entailed?
The Fed first received concrete information that LIBOR rates were being
intentionally misreported on April 11, 2008 during a call with a Barclays employee,
who explained that Barclays was under-reporting its rate to “avoid the stigma
associated with being an outlier with respect to its LIBOR submissions, relative to
other participating banks.
The manipulation of LIBOR continued through at least mid-2009, not just for the
sake of avoiding the stigma associated with appearing weak during the financial
crisis, but also for the then unknown motive of benefitting individual derivatives
Who might have benefitted from and who
might have been hurt by the manipulation of
Categories of LIBOR manipulation : Trading-based manipulation
The immediate beneficiary of trading-based
manipulations was specific Barclays traders
trading-based manipulations might have
affected numerous other financial contracts
that referenced the rate of LIBOR, such as
The LIBOR scandal has had the immediate effect of
undermining public confidence in financial markets.
• Barclays bank has had to pay nearly $453
million dollars in penalties to U.S. and U.K.
regulators. Barclays received an estimated 30
percent discount on its penalties in exchange
for cooperating fully with the authorities’
How and why did Barclays manipulate LIBOR?
Barclays is the only bank that
has admitted to manipulating LIBOR.
Intentionally misrepresented the rate at
which Barclays could borrow money
from other banks in the London inter
Barclays’ LIBOR submitters intentionally
under-reported or over-reported the
bank’s cost of funds
LIBOR submitters held constant the
bank’s cost of funds when it actually
either increased or decreased.
According to the statement of facts supplied by the DOJ, Barclays employees
attempted and succeeded in manipulating published LIBOR rates during
the mid-2005 to mid-2009 time period.
The motive for these misrepresentations varied over time.
In the DOJ’s Statement of Facts, Barclays admitted to three
different types of manipulations.
Barclays’ Swaps traders - To manipulate the published
LIBOR rate for the benefit of specific derivatives trades.
Submitted intentionally low LIBOR rates in order to avoid the stigma of
appearing weak relative to other banks during the financial crisis.
(banks were often compared against one another)
Barclays swaps traders communicated with swaps traders at other
unidentified LIBOR contributing banks to request LIBOR submissions
that would be benefit specific derivatives trades of Barclays’ traders
and/or their counterparts at other
LIBOR’s influence extends beyond
the realm of financial transactions.
LIBOR has become the shorthand
measure of stress in global money
LIBOR Banks Sued in Civil Court
• More than 40 suits have been filed related to LIBOR manipulation. LIBOR is used as a
reference point for mortgages and other trades worth $300 trillion.
US Home Owners V/S Banks
• Homeowners in the U.S sued big banks like Bank Of
America, Citigroup, Barclays, UBS, JPMorgan Chase, Deutsche Bank and others of
• The lawsuit includes 100,000 plaintiffs who have lost thousands of dollar each.
• According to lawsuit, for at least 10 years between 2000 and 2009 the banks
conspired to falsely increase the Libor on the first day of each month for the purpose
of increasing the rates on home owners’ mortgages
Municipal Lost Billions
• The city of Baltimore and others in the US filed a lawsuit which alleged that Libor
caused payments on their interest rate swaps to be smaller than they should have
• It is estimated that the manipulation of Libor cost municipalities at least $6 billion.
• NCUA Lawsuit: The National Credit Union (NCA) Administration sued Credit Suisse
Group AG, UBS AG, JPMorgan Chase & Co and 10 other international banks 13 for their
involvement in the manipulation of LIBOR because of which the credit unions had to
lose out on millions of dollars on interest income as a result of rate-rigging.
• Fannie Mae Lawsuit: On October 2013, The Federal National Mortgage Association
(Fannie Mae) accused nine of the world’s largest banks and sued them of colluding to
manipulate interest rates and seeking more than $800 million of damages. Fannie Mae
filed the complaint in the U.S. District Court in Manhattan, where it accused the banks
of conspiring for many years to suppress Libor including during the 2008 financial crisis.
• Fraddie Mac Lawsuit: UBS and Credit Suisse are among 15 banks to be hit with a
lawsuit by the United States government-owned mortgage finance company Freddie
Mac as a result of the Libor manipulation Freddie Mac is suing the banks, plus the
British Bankers’ Association that was responsible for overseeing Libor, after it was
found that Libor rates were artificially lowered by certain traders to maximize profits.
• Bershire Bank: New York-based Berkshire Bank filed a class-action suit against the 16
banks responsible for setting Libor - the widely used interest rate that is now known to
have been manipulated by bankers for years. The Claim made by Berkshire Bank in a
proposed class-action lawsuit was that it was cheated out of interest income on loans
made in New York because of the rigging of the LIBOR rate.
Reactions to the Scam
Rift between regulators in Europe and US
The New York Federal Reserve,
for example, knew Libor was
"not reliable," he says, but it
never followed up with the
Bank of England
Libor has been discredited and
should be scrapped in favor of British press exploding over the
a new rate based on real
scam while in US parties trying
transaction data while
to tramp down rather than
regulators in Britain favour a
raise the anger.
Reactions to the Scam
(online survey of 103 respondents from 44 identifiable banks
across the globe by LEPUS)
60% of respondents
The majority of the
43%, believe that
respondents to the
weak regulation of
aware of rate
Majority of them
survey, 57%, believe
the way in which
want the setting of
that the rigging of the LIBOR rates are set is
tolerated the practice LIBOR mechanism to
LIBOR rate has been the issue that lies at
and allowed it to
pervasive in the
the heart of the
continue to preserve
Implications of the scam
The banks being investigated for Libor manipulation could end up paying an
approximate 35 billion in legal settlements, separate from any payments to
Banks would have to now base their submissions on market prices rather
than some hazy estimate of borrowing costs. Libor would need to be set
according to actual borrowing and lending done by banks,
Management of the LIBOR will likely be transferred to regulators to oversee
the rate going forward. Currently, the LIBOR is managed by the British
Bankers Association, a banking and financial services trade association
Implications of the scam
Proposed new regulations will also make banks and individuals more accountable
for manipulation attempts, including criminal charges
Three new criminal offences were introduced under Part 7 of the Financial
Services Act 2012
• making false or misleading statements
• creating false or misleading impressions
• making false or misleading statements or creating a false or misleading impression in relation to
Although LIBOR is currently stated to be the only relevant benchmark for the
purposes of the new criminal offence under Part 7, it is likely to be only a matter
of time before the criminal offence is extended to other benchmarks
The Wheatley Review
•The government of the United Kingdom commissioned Martin Wheatley, a
managing director at the Financial Services Authority (FSA).