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The LIBOR scandal explained

A question in many people’s minds is what is LIBOR? LIBOR is the acronym given to the London Interbank Offered Rate. It is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks.

The British Bankers Association (BBA) calculates the LIBOR rate on a daily basis, it is calculated using the estimates submitted by the major international banks based in London, and represents the interest rate they must pay in order to borrow cash from other banks. The rate a bank must pay is in a way, a reflection of their financial stability and strength, the banks rivals can also use this to see how much the bank is trusted.

The Financial Service Authority (FSA) says LIBOR is a benchmark reference rate which is fundamental to operation of both UK and international banks.

Since the 2007 global credit crunch, LIBOR has become somewhat an indicator of the amount of financial strain major London-based banks find themselves in. Prior to September 2012, LIBOR was both calculated and published by Thomson Reuters on behalf of the BBA. In July 2012, it became apparent that systematic rigging of the LIBOR rate existed between some of the biggest banks, including Barclays and UBS. The LIBOR market has been compared to a “cesspit” of dishonesty by the Deputy Governor of the BoE, Paul Tucker.

An argument could be that the LIBOR scandal has come about through the deregulation of the banking sector. During the boom years and even through to 2008, Brown advocated ‘light-touch’ regulation in an effort to keep the city and his boom going. The FSA were encouraged not to be thorough and in turn, ignored many of the faults in the banking system.

Recent announcements by Osborne to ‘electrify’ the ring fencing of retail and investment banking show the coalitions attempt to appeal to the public’s anger at the banks. Osborne warned that if banks did not comply, they could face being broken up as 2013 becomes ‘the year we reset our banking system’. Days later the report came of RBS’s implication in the LIBOR scandal as the bank was handed a £390m fine for ‘widespread misconduct’ in rigging the LIBOR rate until as recently as November 2010, two years after it was bailed out by the taxpayer.

Ali Guler

CategoriesEconomy

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