...LIBOR & LIBORGATE Recently there was a news that Barclays would pay $453 million to U.S. and British authorities to settle allegations that it had manipulated LIBOR , a benchmark interest rate that affects some $350 trillion worth of financial transactions. The scandal has since spread to implicate major banks and government regulators around the world, and could be one of the most expensive to hit the financial industry since the 2008 financial crisis. Now the questions which arises in our mind are What is LIBOR exactly?, How it is calculated?, How did Barclays manipulate LIBOR etc. LIBOR IN BRIEF LIBOR is an acronym for the London Interbank Offered Rate, a benchmark interest rate that is published daily. Libor is published under the auspices of the British Bankers’ Association (“BBA”),a trade association with over 200 member banks that addresses issues involving the United Kingdom banking and financial services industries. The BBA defines LIBOR as: The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11:00 [a.m.] London time. We can also define LIBOR as an indicative average interest rate at which a selection of banks (the panel banks) are prepared to lend one another unsecured funds on the London money market. Investors around the world use the LIBOR to calculate the interest rate on myriad forms of debt, from home...
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...its assets. When the lender makes a loan to a borrower, it reviews the current market price for money (interest rate). There are various benchmarks used by lenders to determine the market value of loaned money. This memorandum will discuss the London InterBank Offering Rate (LIBOR), one of the most widely used benchmarks, and how it affects our economy. What is the Libor? The LIBOR is a widely used measure of the current market price for interest rates. It is defined as “The rate at which an individual contributor panel bank could borrow funds, were it to do so by asking for and then accepting interbank offers in reasonable market size, just prior to 11.00am London time” (British Bankers Association, 2012). The British Bankers Association (BBA) created the LIBOR in 1985 to provide a measure of the interest rates charged between London banks. The high percentage of financial transactions occurring in London resulted in a broad acceptance of the LIBOR. More than 20% of all international bank lending and more than 30% of foreign exchange transactions take place in London (British Bankers Association, 2012). In essence, the LIBOR is the equilibrium price between banks for lending money. The LIBOR is produced for several currencies and loan durations. A panel of banks is selected for each currency. The current panel of banks for the U.S. dollar is: Bank of America Bank of Tokyo-Mitsubishi UFJ Ltd Barclays Bank plc BNP Paribas Citibank NA Credit Agricole CIB Credit...
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...TOPIC – LIBOR SCANDAL ........................................................................................................................ 3 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. INTRODUCTION TO THE CASE ..................................................................................................................................... 3 LIBOR AND ITS USAGE .......................................................................................................................................... 3 DETAILS OF THE CASE AND IMPACT ON STAKEHOLDERS ...................................................................................................... 4 UNETHICAL BEHAVIOUR OBSERVED ............................................................................................................................. 5 REMEDIAL MEASURES ........................................................................................................................................... 6 SUMMARY & CONCLUSION REMARKS .......................................................................................................................... 8 MISCELLANEOUS - ASSIGNMENT DOCUMENT RECEIVED .................................................................................................... 8 REFERENCES ......................................................................................................................................................... 8 Assignment 2 1. ABOUT THE TOPIC – LIBOR SCANDAL ...
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...The LIBOR scandal One of the most important and crucial interest rates in finance, the LIBOR (London Interbank Offered Rate) has recently been involved in a very serious scandal that has shocked many beyond the financial world. Many billions worth of financial contracts (approx. 800 trillion) rest upon the London interbank lending rate, and therefore it has become so shocking. The LIBOR is regulated every day by a group of leading worldwide banks, and takes into account the currency rates of 10 different currencies and as well the rate for 15 different lengths of loans (from overnight to 12 months). However the most important is the 3-month US dollar LIBOR. Banks use these rates in order to establish the interest for three months dollar loan to other banks. The LIBOR is published daily at 11:30 am (London time) by Thomson Reuters. It measures the cost of funds to large global banks operating in London financial markets. Each day, the BBA ( British Bankers' Association) asks a group of 18 major global banks the following question: “At what rate could you borrow funds, if you wanted to ask and accept a inter-bank offer in a reasonable market size just prior to 11 am?” The highest 4 and lowest 4 responses are excluded, and the average of the remaining 10 is calculated. There are separate LIBOR rates for all 15 different maturities (from 1 day to 1 year) for each of 10 currencies. However, because these rates submitted by global banks are only estimations, and not real...
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...Birth of LIBOR LONDON (Reuters) - Minos Zombanakis, born 86 years ago on a Greek island, remembers the birth of the interest rate benchmark now at the heart of a global rigging scandal well. "I was, more or less, if you excuse the lack of modesty, the one who started the whole thing," he laughs, speaking by telephone from his village among citrus orchards in Crete. Zombanakis was running the newly-opened London branch of Manufacturer's Hanover, now part of JPMorgan, when the bank organised one of the first syndicated loans pegged to what he dubbed a London interbank offered rate (Libor) in 1969. The $80 million loan, for the Shah of Iran, embodied the way cross-border financial markets that had been effectively closed since 1929 were being prised open - sowing the seeds for London to flourish as a global financial centre. The ambitious bankers of that era had little idea that the rate they were using to price these loans would become a central cog in the global financial system and a benchmark for $550 trillion in contracts ranging from interest rate derivatives to home loans and credit cards. Four decades on, that rate has been discredited by the brazen attempts of traders to game it, by the banks that have lied about their true costs of borrowing and by the regulators accused of either condoning or failing to stop manipulation. Libor, designed to reflect a bank's borrowing costs accurately, burst into the headlines in June when Barclays (BARC.L) was fined a record $450...
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...What is LIBOR and how is it calculated? How has LIBOR ben used historically? London Interbank Offered Rate is an interest rate estimated by the member banks of the British Banker’s Association. It is the rate that they would charge for borrowing from other banks. Until 1984 there was no uniformity in trading activities between the banks, hence the BBA formed a rate to create uniformity to create more business and greater depth to the London Interbank market. The official definition is “The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11:00 London time.” What problems with LIBOR have been identified? The major banks submitted the interest rates from major banks and took an average to calculate the LIBOR. The problem with this was that they banks inflated their interest rates in order to make them seem more profitable. The LIBOR is used worldwide hence falsifying the interest rates will manipulate the US derivative market. The traders fixed the LIBOR rate in order to make more profit. There is also an cultural problem with calculating LIBOR. The Banking industry and the regulatory agencies are very friendly and there is no healthy separation between them. Which Institutions are involved? How many have they been prosecuted? Why is there not a standard fine amount? The major institutions involved in the fixing were the Barclays Bank and the...
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...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...
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...Comments on “The Turmoil at Barclays” The article briefly summarizes the Libor scandal that involved the world’s biggest banks and its impact on Barclays. Mr. Bob Diamond, the head of Barclays for over 15 years, took the blame and was forced to resign. Barclays was fined near a half billion dollars and might have to pay more to settle the lawsuit. The misdeed is expected to be explained by the executive’s and traders’ misunderstanding of the indication conveyed by the bank of England, but the prevarication did not excuse Mr. Diamond’s breach of duty. Apart from Barclays, there are other dominant banks that being investigated. The large scale of involvement infers interest manipulation is ubiquitous in the financial market. Because Libor is determined by taking the average of the world’s most influential banks’ reported interbank offered rate after omitting the highest and lowest 25 percent of submissions, it is a critical reference when banks set interest rate on consumer and corporate loans. This is not the first time Barclays had manipulated London Interbank Offered Rate in favor of its earnings. During the global economic upswing in 2007, they conspired with other banks to report the artificial interbank rate. Libor was maneuvered somehow higher or somehow lower so as to generate profit from derivatives pegged to the benchmark rate. The previous head, Mr. Diamond resigned after pressure from senior investigation department increased and the impact of the misconduct start...
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...What is LIBOR Scandal In June 2012, Barclays was involved in alleged manipulation of London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) scandal .The scandal led to more serious manipulation events in the whole world afterward. These violations reflected not only the defects of the mechanism, but also a huge loophole in regulation. June 29, 2012, Barclays Bank reached a settlement to the United States Commodity Futures Trading Commission, the US Justice Department and the UK Financial Services Authority on its alleged manipulation of LIBOR and EURIBOR scandal. According to the investigations from the three regulatory agencies, Barclays bank executives and traders requested quoters manually adjusted LIBOR and EURIBOR rates for more than 257 times from year 2005 to 2009. They tried to raise or lower interest rates in order to increase profits from derivatives transaction or to mitigate the losses. In the end, Barclays agreed to pay the fine of 290 million GBP (equivalent to 450 million US dollars). In terms of the lawsuit against LIBOR manipulation to Barclays Banks, US Municipality sued Libor setting banks for the manipulation of LIBOR. Since municipalities started adopted interest rate swaps to hedge their municipal bond sales in the late 1990s, they used variable interest rate which typically had interest rates as much as one percentage point lower than fixed interest rate. States and localities bought $500 billion in interest rate swaps to hedge...
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...F&C Y3 Q4 1213 CASE 1 Royal Bank of Scotland and Libor The wrong stuff A widening scandal threatens to suck in more banks, and ruin more careers Feb 9th 2013 |From the print edition The Economist THEY were said to be among the most talented of their generation, recruited after exhaustive interviews and gruelling internships. They worked at firms prepared to spend small fortunes to attract and retain them lest they take their skills elsewhere. Yet the moral bankruptcy of traders implicated in the rigging of the London Interbank Offered Rate (LIBOR), one of the world’s most important interest rates, is matched only by the incompetence with which they covered their tracks. Take traders at the Royal Bank of Scotland (RBS), who left a trail of evidence in a trove of e-mails and audio recordings detailing how they set about trying to manipulate LIBOR, even after they knew investigators were looking into the issue. “We’re just not allowed to have those conversations over Bloomberg anymore,” said one trader, laughingly, in a call to another who a little earlier had asked in writing for a rigged rate. “Its [sic] just amazing how libor fixing can make you that much money,” was the verdict of another trader. These exchanges, and many others, were part of a settlement announced on February 6th in which RBS admitted to rigging rates. It agreed to pay fines of $475m to American regulators and another £87.5m ($137m) to Britain’s Financial Services Authority. By the arcane mathematics determining...
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...provide background and touch on some technical nuances involved. The traditional method of discounting using a Libor curve misstates the required collateral on a swap and its mark-to-market value. When collateral earns OIS, collateral and mark to market should be based on valuations that discount using a risk-free curve, such as the OIS curve. Investors need to rethink the relationship between forward rates and par rates. For the same par swap curve, if the curve is upward sloping and Libor-OIS spreads are positive, forward rates are lower under OIS discounting than they are under Libor discounting. The mark-to-market impact of a switch to OIS discounting from Libor discounting should materially affect only aged or off-market swaps, since the mark-to-market value of a par swap at initiation is zero under both discounting schemes. Possible market impact: − Impact on directional books: Given the rally in rates over the past few years, natural receivers of swaps should benefit and natural payers could lose in a switch to OIS discounting. This has implications for entities with large directional swap books, such as insurance companies and the GSEs. − Sensitivity to Libor-OIS spreads: Under Libor discounting, the mark-to-market value of a swap does not change as long as the Libor curve is unchanged. However, under OIS discounting, even if Libor swap rates are unchanged, markto-market values of a swap book would have exposure to...
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...4. THE BANKING SCANDAL: LIBOR RIGGING 4.1. LIBOR Libor is a benchmark interest rate based on the rates at which banks lend unsecured funds to each other on the London interbank market. Published daily, the rate was previously administered by the British Bankers' Association (BBA). But in the aftermath of the scandal, Britain’s primary financial regulator, the Financial Conduct Authority (FCA), shifted supervision of Libor to a new entity, the ICE Benchmark Administration (IBA), an independent subsidiary of the private exchange operator Intercontinental Exchange, or ICE. 4.2. THE BANKING SCANDAL: LIBOR- RIGGING In order to calculate the Libor rate, a representative panel of global banks submit an estimate of their borrowing costs to the Thomson...
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...table: | Company A | Company X | Fixed | 10% | 12% | Floating | LIBOR + 0.25% | LIBOR + 0.75% | As can be seen from the table, Company A has an absolute borrowing advantage in the sense that Company A has access to both lower fixed and floating borrowing rates. Despite this, Company A can still benefit from engaging with Company X in an interest swap. The reason is that Company A has a relatively larger advantage in borrowing at a fixed interest rate compared to borrowing at a floating interest rate. The absolute advantage of Company A, however, does imply that Company X will need to pay a spread in order to secure the transaction. To see why, imagine the following agreement: * Company A borrows at the fixed rate of 10% * Company X borrows at the floating rate of LIBOR 0.75% * Company A (float payer) and Company X (fixed payer) engage in a fixed-for-floating interest rate swap With this agreement, Company X will reduce its fixed cost of borrowing from 12% to 10%. On the other side, Company A will increase its floating cost of borrowing from [LIBOR + 0.25%] to [LIBOR + 0.75%]. Obviously, Company A would not be willing to engage in this agreement. However, by paying a spread, Company X can incentivize Company A to participate in the swap while still reducing its own cost of borrowing. The minimum possible spread needed is 0.50%. At this spread company A will borrow at LIBOR + 0.25% while company X will borrow at 10.5%. The above arrangement will...
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...EC-408E-INTL ECONOMICS-A-12/S3 DR. HAMID ZANGENEH The Global Financial Crisis & LIBOR London Interbank Offered Rate One Of The Largest Banking Scandals In History, An Emerging Controversy Over Whether Major Financial Institutions Have Been Manipulating The LIBOR, A Key Interest Rate Banks Use To Borrow Money From Each Other That Is ”Used As A Benchmark To Set Payments On About $800 Trillion Worth Of Financial Instruments.” MIT Professor Of Finance Andrew Lo Told CNN Money That The LIBOR-Manipulation Story “Dwarfs By Orders Of Magnitude Any Financial Scams In The History Of Markets” Anthony Bruno 7/21/2012 Abstract Following investigations into Barclays' manipulation of London Interbank Offered Rates (Libor), CFR's Sebastian Mallaby highlights three implications from the unfolding scandal: Conflicts of Interest Within Banks: Barclays' distorted reports on borrowing rates demonstrate the system's failure to prevent damage from conflicts of interest between banks and their traders. "Chinese walls don't work," Mallaby says. "It's a lesson we've learned over and over again in finance." The Role of Regulators: The alleged collusion between the Bank of England and Barclays indicates a critical challenge in the governance of financial markets: Regulators are forced to bend rules to protect banks, "not because they are bribed," says Mallaby, "but because they are blackmailed, in the sense that the banks, by threatening to go under and do untold damage to...
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...Marijan Jurac Chelikani – FIN 310 LIBOR Report * After reading the report on LIBOR reform I was first trying to get a sense about what LIBOR did exactly and what were the issues that it had brought forth to call for the reform. The further I read, the more I began to understand the pros and cons of a having LIBOR. Unfortunately I personally found that there were actually more cons than pros. * * As mentioned in the report LIBOR has been the catalyst for fraud and unfair play in the past years. This being said I cannot see this reform in LIBOR go the right way for either party. The FED might have already lost the trust of many people around the world with the scandals of late that have taken place. Many people were hurt when they took out loans and LIBOR was artificially high. However, when LIBOR was artificially low people paid less than they should have. This is a small example on the controversy of whether or not LIBOR should be reformed or completely thrown out the window. * * LIBOR is a very important index, which serves as a benchmark for derivatives. Being the most widely used interested rate in the world, it is not easy to just throw it out the window, as many people who were on the brunt of the scandal would wish. * * I believe that LIBOR is not as risk-free as we think it is. I believe that the scandals that were taken place proved that. Many people lost their savings and not only were the savings lost, but the banks that...
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