LIBOR Manipulation
A Brief Overview of the Debate
FTI Consulting
April 20, 2011
David M. Ellis, PhD
Managing Director, Economics
LIBOR is a key, central part of the global financial market system. Over $10 trillion in corporate loans, floating rate notes, adjustable rate residential mortgages etc., are pegged to LIBOR. Additionally, LIBOR is the key rate in the $350 trillion market for interest rate swaps. Finally, many other derivatives depend upon LIBOR in some manner or other.
Therefore, if LIBOR rates are being distorted or manipulated in any way, the ramifications extend to nearly every corner of the global money markets and to participants in many sectors of the global economy other than banks and financial institutions. There has been no evidence, to date, of manipulation of LIBOR arising from such activities as illegal contacts between banks or breaches of Chinese walls, etc. Rather, the allegations have been based on empirical analysis (sometimes of a very ad hoc nature) either of the bids from which published LIBOR rates have been calculated or of a comparison of LIBOR with similar interest rate benchmarks.
At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?
There have been numerous such studies that have been undertaken in the last three years. Several of them are summarised below. While some claim to have found evidence of manipulation by one or more banks, their evidence is not conclusive and in some areas is in fact highly questionable.
LIBOR stands for London InterBank Offered Rate. It is produced for ten currencies with 15 maturities quoted for each, ranging from overnight to 12 Months producing 150 rates each business day. LIBOR is a benchmark; giving an indication of the average rate a leading bank, for a given currency, can obtain unsecured funding for a given period in a given currency. It therefore represents the lowest real-world cost of unsecured funding in the London market.