LIBOR

Exploration Essay

The London Interbank Offered Rate, also known as LIBOR, is a benchmark interest rate that major global banks will look at before lending each other money. LIBOR is internationally accepted and sets the interest price day by day for banks wanting to borrow money from each other. This rate is calculated and updated on a daily basis. It is based on five currencies including the U.S. dollar, the euro, the British pound, the Japanese yen, and the Swiss franc. All of these combined, lead to a total of 35 different LIBOR rates calculated and reported each business day. LIBOR is also the basis for consumer loans in countries around the world, so it impacts consumers just as much as it does financial institutions. The interest rates on various credit products such as credit cards, car loans, and adjustable-rate mortgages fluctuate based on the interbank rate. However, recently, banks are trying to move away from using this method. The reason for this is that some major banks were allegedly manipulating the LIBOR rates. They took traders’ requests into account and submitted artificially low LIBOR rates to keep them at their preferred levels. The intention behind this was to increase traders’ profits who were holding positions in LIBOR-based financial securities. Following reporting by the Wall Street Journal in 2008, major global banks, which were contributing to the LIBOR determination process, faced interrogations. Banks and financial institutions such as Barclays, ICAP, Rabobank, Royal Bank of Scotland, UBS, and Deutsche Bank faced heavy fines. further actions were also taken against their employees who were found to be involved in the fraud. Although LIBOR has been used since the 1980s, regulatory reforms have begun in recent years to reform benchmark rates and replace LIBOR with another alternative. It's expected that U.K. regulators will no longer require banks to publish LIBOR rates after 2021