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Everything you've ever wanted to know about LIE-BOR

LIBOWe all now know that bankers have manipulated LIBOR and been caught doing it.  But why does it matter and why would the United States be worried about LIBOR? It's London Interbank Offer Rate after all?

Its because LIBOR influences a wide range of products across 10 global currencies. It sets the basic interest rate for products in the United Kingdom, Europe, much of Asia and to some extent in the
US.   So we’re lucky to have branded it "London", because there is a separate daily "LIBOR" rate,
for each currency involved.

Private banks (like Barclays, RBS and others) report the rates at which they believe they could get borrowing from other banks. The estimates are collated and published each day, setting the basic
interest rate from which all others are calculated. 

Falsely reporting LIBOR is the equivalent of a consultant heart surgeon lying about a patient’s blood pressure to make the results of his treatment look impressive.

So how does it work? How are Libor Rates Calculated?  The British Bankers' Association selects "panel banks" which are asked how much interest they think they would be charged by other banks if they were to borrow money in certain currencies and over certain periods of time. These panel, or "contributor banks", submit their perceived borrowing rates daily. Reuters collects the rate information from all contributor banks and produces an adjusted average.  Depending on the currency involved with the rate, there are 7 to 18 contributor banks.

The current 18 panel banks for the US Dollar include US, Canadian, German, Japanese, Swiss and amongst others, Barclays, HSBC, Lloyds and RBS. This is why the US regulator was sufficiently cheesed off to fine in the States, at the same time as the UK FSA fined banks at home.

Neither Barclays nor RBS could have influenced LIBOR on their own - that required collusion between banks. This collusion moved rates up or down over a period of years and helped enhance individuals bonuses and bank profits/reputation. Later, during the financial crisis, banks wanted to appear healthy, so they submitted lower borrowing rates than they could actually achieve which showed their reputation / credit in the market in a better light than they merited.

With acknowledgements to David Corneilus of Bishop Fleming (a fellow Kreston member firm to PEM) upon whose excellent and more detailed post this is based. 





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