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Libor Scandal

In: Historical Events

Submitted By lauryretro
Words 491
Pages 2
Corporate Finance
Causes and Consequences of the LIBOR scandal
In 2012, as a worldwide investigation was made to the way interbank manipulated and offered their lending rates, a scheme was revealed and major banks were part of it; basically they leverage the mention interest rate to obtain a profit. Most notable banks were the Royal Bank of Scotland, UBS and Barclays. However as the investigation continued, new banks were found to be part of the scheme and were made to pay for lawsuits and penalties, as of now, a total of 3.7 billion, a number that can still rise. What they mostly did was to manipulate the London Interbank Offered Rate or LIBOR during several years.
LIBOR works as a benchmark interest rate which is created by the rates at which the banks lend their unsecured funds between them on the interbank London market. Libor it is used by many banks as a base to set consumers and corporate loans rates. By 2005 to 2007 it was reported that Barclays was manipulating the LIBOR rate, meaning that they traders would be able to make profit on derivatives that were connected to the base rate. The swaps traders would ask to the banks employees who were in charge of submitting the rate to alter the figures that will benefit the traders, instead of submitting the real rate that Barclays used to borrow money. Then these employees giving wrong numbers would coordinate with other banks so others rates got alter. During this time the LIBOR rate was maneuvered as it was necessary either upward or downward. As the years 2007 – 2008 came Barclays still manipulated the LIBOR rate this time downward to keep up appearances that the bank was less risky, which eventually provide the bank with a high degree of stability.
Now what all this changes brought? First, investors’ lost trust in the marketplace since you are not sure that the lending rates use between banks are the right

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