WHAT THE HELL IS LIBOR; UNDERSTANDING THE LATEST BANKING SCANDAL

Sarah,

The latest banking scandal revolves around a “benchmark rate” known as LIBOR.(London Interbank Offered Rate)  What hell is LIBOR?  I didn’t know either.  Here is the basic breakdown.  In the 80’s there arose the demand for a uniform interest rate.  A company in London started asking each major bank what their current interest rates were and then calculated an average interest rate based on these estimates.  Other banks and financial institutions then based their interest rates on the LIBOR average because it was deemed to be reliable.

So what’s the problem?  First, starting as early as 2008, there were indications that big banks were providing LIBOR with artificially low interest rates so they could borrow at lower rates and turn a profit.  These low rates also worked to make banks appear healthier financially. 

More recently, regulators have accused the bigger banks of colluding to manipulate their interest rates.  In the last year, Barclays, a British bank, was caught giving false rates to increase profits and manipulate the picture of its financial health.  The bank has since negotiated a settlement with authorities. 

Now, in the wake of the Barclay’s settlement, banks are scrambling to protect themselves from accusations of rate fixing.  Some are even turning on each other in exchange for immunity from regulators.  Expect other banks to be caught and fined in the near future.

Bottom Line: Banks are a joke.