By / September 13, 2012

Libor manipulation and its consequences

The interest rates produced daily through the Libor process are used as references in contracts for up to an estimated…

Image Copyright Kirill_M 2012. Used under licence from Shutterstock.com

The interest rates produced daily through the Libor process are used as references in contracts for up to an estimated US$800 trillion in financial instruments (such as loans and derivative contracts).

Libor percentage
Image Copyright Kirill_M 2012.
Used under licence from Shutterstock.com

However, it has recently been established that Libor has been manipulated by Barclays Bank over a number of years. Erroneous interest rate submissions – both higher and lower than they ought to have been – helped produce greater profits and, during the financial crisis, protect Barclays’ reputation. Barclays has agreed to a €373 million fine from US and UK regulators.

It is another blow to the banking sector, the more so since other major international banks also seem to be implicated.

Guesstimates of the financial consequences of the false rates range up to many billions, but it is very difficult to determine with any accuracy.

Improvements in the way Libor is calculated are being sought. Greater transparency and proper independent governance in the process along with some control of individual judgments on interest rate submissions appear necessary. Furthermore, effective regulation and sanctions would dissuade future participants from committing fraud.

The EU has already acted, with the Commission adding such benchmarks to its proposed market abuse legislation. The EP’s ECON Committee plans to hold a hearing on Libor.

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