Bba Libor

Topics: Bank, Finance / Pages: 8 (1981 words) / Published: May 5th, 2013
Breakdown: Libor Scandal
LIBOR (London Inter-Bank Offered Rate) is a benchmark for short term interest rates estimated by averaging the lending rates charged by large banks in London to other banks in London. Financial markets use LIBOR as a benchmark rate for mortgages, student loans, derivatives contracts, and interest rates for credit cards. This benchmark also measures trust in the financial system and the faith that banks have in each other’s financial health. In June 2012 traders at Barclays were caught intentionally fixing the LIBOR rate to make huge profits on derivative trades or to make the banks look more secure than they were. This has since spiraled into a massive scandal in which 15 other banks are under some form of investigation for fraud connected with Libor fixing.
Issue Background
Financial institutions use Libor as a benchmark for products more than any other index rate (bbalibor.com, 2012) and approximately $800 trillion of transactions are tied to Libor (“Libor”, 2012). The British Bankers Association (BBA) owns Libor and it includes bank lending rates for 10 currencies and at 15 different maturities (bbalibor.com, 2012). Every day these member banks answer the question “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” (p. 4). As depicted in figure 1, the 18 member banks submit their rates to Thomas Reuters who calculates the average rate and reports it (bbalibor.com, 2012).
Figure 1 Libor calculation. Courtesy of Google Images
Figure 1 Libor calculation. Courtesy of Google Images The rates submitted by each bank are supposed to represent the lowest rates each bank could borrow funds at for each given currency and maturity. The rate is a trimmed average of the reported rates by throwing out the four highest and four lowest rates to provide a more accurate rate for the market. According to the BBA Libor website (2012):

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