What is Libor and why does it matter?
Libor stands for London Interbank Offered Rate. “It is considered to be an average interest rate which is estimated by some leading banks in London that they would be charged if borrowing from other banks.” Libor rate is considered to be the primary benchmark for short term interest rates around the world. It is the average cost of borrowing and is estimated on a daily basis by a group of banks as mentioned above. Libor rate gained momentum around the 1980’s when it became apparent that there were an increasing number of banks were trading actively in many new market instruments at that time namely: interest rate swaps, foreign currency options and forward agreements. Libor Scandal
Preceding the financial crisis in 2008, the Libor rate was seen as a reflection of the state of many bank’s balance sheet. Barclay’s and many more big banks were accused of distorting the LIBOR by submitting fake low borrowing estimates, thus it adversely affected the LIBOR by making it an inaccurate representation of borrowing costs and affecting the rates of many short term interest rates around many banks. Barclays had to settle $ 450 million to relevant authorities. It also claimed that it was not possible for the final LIBOR rate to be influenced solely to its manipulations. Many more banks were also suspected of doing the same thing but evidence shows that a single bank can do significantly impact the rate. The reason as to why Barclays had submitted wrong and low borrowing costs were simply because they estimated that rivals were doing the same thing. If other banks would have been submitted higher estimates, Barclays would have appeared to be in trouble since other banks would appealed to be more credit worthy than other. Real economy is affected when such illegal cooking of Libor rate takes place. This takes place since Libor affects the interest rates paid by hundreds of millions of people on their own mortgages, small...
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