Libor Controversy - Lessons Learnt

Introduction¹

Recently, Barclays Bank was fined a total of £290 million (USD 450 million) for attempting to manipulate the daily settings of London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor) as a result of an international investigation.²

The controversy has left financial markets reeling and one may question the ethics of the banking industry.

Libor is the world's most widely used and most important benchmark for short-term interest rates because it is the rate at which the world's most preferred borrowers are able to borrow money.³

But what exactly is Libor, and why Barclays is in so much trouble for manipulating it?

Libor Concept

In simple terms, Libor is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is the primary benchmark, along with the Euribor, for short term interest rates around the world. ⁴