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Q&A: what is Libor and what did the banks do to it?

Over a billion pounds has been handed out in fines over the Libor scandal, but what exactly is it?


by Victoria Bischoff, Michelle McGagh on Feb 06, 2013 at 15:00

Q&A: what is Libor and what did the banks do to it?

Three banks have been fined a total of £1.62 billion over their part in the Libor-rigging debacle.

The scandal has left financial markets reeling and one again called into question the ethics of the banking industry.

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

What is Libor?

Every morning banks work out how much money they need to borrow from their peers to plug any holes in their balance sheets. Or, if they have an excess of available cash, how much they can afford to lend.  

What Libor – the London Inter-Bank Offered Rate – does is formally measure the cost of this inter-bank lending, setting out the average rate banks pay to borrow from one another.

How is Libor calculated?

There are 150 different Libor rates calculated on a daily basis by Thomson Reuters for 15 borrowing periods ranging from overnight to 12 months, spanning 10 different currencies.

These rates are calculated based on data submitted by a panel of major banks – the number of banks on the panel varies according to the currency. The UK’s sterling rate, for example, is based on submissions from 16 banks, while the US dollar rate, on the other hand, is calculated using a panel of 18.

Each bank is asked the same question: ‘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 11am?’

So basically, if you need to borrow cash from your fellow banker friends, how much would they charge you for it?

Once the rates are submitted, the four highest and four lowest rates are ignored, and those left are used to calculate the Libor rate which, along with the individual rates submitted by each bank, are then published before midday UK time every weekday.

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27 comments so far. Why not have your say?

Philip Terry

Jun 30, 2012 at 10:00

If this sort of activity is so important, wouldn't it have been sensible for each bank to appoint someone at board level to be responsible for the collection of information on a daily basis and for the submission to Thompsons Reuters. Or is this best left to traders, so that directors of these Banks can claim complete ignorance of what was going on!

I have no doubt the directors knew exactly what was going on and probably directed the operations.

The fact remains that these barrow boys are custodians of our money and the sooner these banks are broken up the better.

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sylvia bulman via mobile

Jul 01, 2012 at 15:19

are lifetime mortgages linked to libor could they be affected by such practice

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Martin via mobile

Jul 02, 2012 at 07:18

This article is very useful and very clear, well done! I wish more reporting was presented this well. The Beeb and so many other reporters/papers often fall over themselves complicating stories only to give less information in less informative ways.

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abbass hassan

Jul 02, 2012 at 09:35

I wonder if bank of England is involve ?

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Defend bankers...hate capitalism

Jul 02, 2012 at 20:12

Agree with Martin, really useful and clearly written article. Thank you.

On another note, what is anyone doing using LIBOR as a legitimate indicator of a banks performance. If you asked me how much I thought it would cost me to borrow funds and then lent money to me at that rate (or based my credit worthyness on what i said) then what do you expect me to say?

Its capitalism...make as much money as you can.

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James (Doctor J) Groves

Jul 03, 2012 at 16:21

The LIBOR rate setting process is the collection of opinions and judgements of 14 submitting banks. Therefore this is a subjective and interpretiver subject. Such is the Federal Reserve Rate process only this is decided upon by a central banking authority - each Reserve Head and the leader in conference. Public policy, needs for profits, etc., would I expect be normal factors in determining the rate. What exact laws and regulations were violated? I would bet their are vague. So, what the heck is behind these actions and so called scandle? Who is motivated to proceed with it and why?

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Jul 03, 2012 at 21:16

Sorry, I do not find the article to be very clear. i) If Barclays was (initially) submitting higher rates than other banks, with whatever frequency, then were not these noticably higher submissions excluded from the LIBOR calculation (top 4 rates ignored, it was said)? ii) it is not explained what a small number of not very senior traders were able to do illicitly such as to cause the submission to be overstated, nor how the action increased (or appeared to increase) their trading desk’s profitability – and which was cause, and which was effect?

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Jul 04, 2012 at 10:36

This article is very helpful and responding to S O , the issue I believe is not only about Barclays making a higher submission but asking their colleagues to falsify their Libor submissions so that they could make bigger profits. Barclays in my opinion was soliciting its colleagues into submitting higher end LIBOR figures creating a chance for them to be included in setting LIBOR.

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an elder one

Jul 05, 2012 at 17:34

I find the article as clear as mud and wonder with the same observations noted by James Groves and S O. In my unlearned mind what has occured is what banks do within the law all the time in order to manage the business. It seems to me that the setting of Libor is a protocol agreed between all banks; if so the whole industry is implicated in the alleged transgression; and in any case where has the law been broken; it seems to be the case of a moral outrage adopted by politicians in the present climate of envy to further their political aspirations.

As an ordinary man in the street how am I supposed to feel outraged by this behaviour; it has always been the case that if you wish to borrow money then you pay the cost however it's derived and if you don't likewhat you're offered you cast around or you don't borrow; if you possess a wit of commonsense.

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John Thorley

Jul 06, 2012 at 09:19

Banks are bent, we know that. Why spend £5-£10 million of our money on a completely pointless inquiry that at best will tell us what we already know? I suppose it's politics. I think the politicians have got it wrong here. The man in the street doesn't give a damn about a bank fixing Libor, he probably doesn't even know what Libor is anyway. He's too busy earning a wage to put food on the table and pay his families bills.

I would ask What did the Butler Report achieve? Chilcot hasn't even reported yet, Leveson was a parade of people who suddenly couldn't remember anything. Now a banking inquiry. All these inquiries cost a fortune and achieve nothing. Put our money into educating our children, policing our streets improving out health service please.

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Jul 06, 2012 at 11:36

The comment from Bob Diamond placing the blame the trading desk entirely is interesting:

Presumably the traders knew the bonuses would come to them and, should it all go wrong, the fines would go to the wider bank.

Similarly, in 2008, the bankers justified the risks because they knew the profits would go to the banks and the government would bail out the losses.

Yet again the likes of Bob Diamond want us to believe they smell of roses. Either he was asleep at the helm and therefore incompetent, or he was, with others, criminal - neither looks good.

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Anonymous 1 needed this 'off the record'

Jul 08, 2012 at 09:55

"The bank released a note written by Diamond detailing a phone call he had received from Paul Tucker, the deputy governor of the Bank,"

My understanding is that Paul Tucker was/is a "Deputy Governor of the Bank of England" NOT Deputy Governor of Barclays which is how this piece by Victotria Bishcoff reads!

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Anthony Winterton

Jul 08, 2012 at 15:34

The Libor crisis is to our politicians what the Falklands is to the Argentine government. They use it to distract us from the fact that they have not a clue about how to fix our economy.

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Tom Bayley

Jul 08, 2012 at 17:20

an elder one: when you talk of the "climate of envy", it's hard not to conclude you are either a banker or an apologist. The kind of debauchery you are condoning may give rise to envy in a few, but I think the regular members of the human race feel only nausea.

"The ordinary man in the street" is well aware the banks have been shown huge leniency by the tax-payer, and have used it as yet another easy opportunity to stuff their wallets. The culture (and the law) needs to change, whether in response to outrage or to a more straightforward visitation of the facts of banking practice. The banks have far too much power over the economy, and they are run by people who use that power to their own ends without regard to the wider outcomes.

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an elder one

Jul 08, 2012 at 21:29

Tom Bayley, you do jump to conclusions; are you one of the envious?

I am neither banker nor apologist, but a retired chartered engineer; frankly in my younger days banking was conceived as a boring career along with accountancy and the like and such offered no attractions for me; not my line at all.

On the matter of libor and the alleged corruption thereof you are in your excitement confusing the specific (libor) with the generally conceived corrupt nature of banking today - easily done by someone who don't generally stop to engage brain before opening his mouth.

What I was trying to say was that if the alleged libor transgression was a legal matter, then why did the politicos see fit to judge, surely if a legal matter then it's a case for the courts. The politicos are cleary, as usual thinking more about the next elections in two or so years time, being well aware of the urdure in which the banks currently are immersed, as beheld by the 'man in the street'.

Frankly, like myself, I believe most people do not properly understand the mechanism of libor and its susceptibility to misuse by people allegedly on the make, or see it as something they can do anything about; they just see it as something the banks do in their line of business, having some vague bearing on what it costs to borrow off them; so what's new!.

No doubt something needs to be done about banking, to better control their self-serving behaviour, but there we plunge into the matter of ethics amongst other things and the difficulties of quantifying what is good or bad, fair or unfair to the public at large and translating the conclusions into law.

Interesting to note, Libor and the various protocols that banks and finance have generally employed have only come to light because the politicos were asleep on watch, or found those practices conveniently served their personal aspirations and thus allowed the financial mess we are in to come about.

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Tom Bayley

Jul 09, 2012 at 18:43

An elder one, I seem to have hit a nerve! Sorry about that.

You say you don't properly understand this libor issue, yet you seem quite certain it's been overblown and the banks have only been conducting business as normal. You must find it hard to square that sentiment with such a large fine on Barclays and the fact its chief executive is so apologetic (even if they are crocodile tears), whilst being so condemning of the alleged misdemeanours and so keen to relegate them to history.

I take your points about the politicos. But to borrow your own argument - that's what they do, isn't it?! It's not illegal.

But it's not just the politicos who are asleep on their watch. I would say 99% of us might be asleep. We have been lulled into this idea that life is so complicated it can now only be understood by experts, that we have to live according to the models 'supplied', that the important things are done only by 'leaders', that our public responsibility is limited to being a voter or whatever. It's true to some extent of course, but the abdication of personal responsibility (which you could translate as a shrinking of our identity) encourages us to have little feeling for anything beyond our own selfish interests. There should be no surprises that this environment breeds conmen.

The solution is to encourage more collective responsibility for life, as cliched an idea as that is and as contrary as it might be to current social theory. Best done (in my opinion) not through proposing a lot of ideals, but by pointing to its antithesis, including the deviousness, cynicism and even insanity of self-interest we have witnessed in the banking sector. The classic way of discouraging undesirable behaviour, of course, is to make an example of it - to name and shame. I can't see much wrong in this TBH?

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an elder one

Jul 10, 2012 at 00:04

Tom Bayley, well, a half apology! thank you all the same.

I don't imply the Libor issue is overblown or not, my viewpoint in the matter is simply impassionate; unlike your own. At my age - into the eighties - human nature with all its eccentricities and perversions ceases to supprise me. In my mind society generally has progressively sunk into an amoral sink over my lifetime. We are all, with exceptions, apparently out for what we can get by whatever means, apparently within the law, or because it seems to be there for the taking (ergo, benefits cheats and the like); an endeavour which often stretches things to the very limit.

It ain't just the banks - though testosterone endowment and greed is much in evidence there nowadays, they are however peopled also with decent characters like anywhere else - it is a fact 'rotten apples' abound throughout this 'must have' society of ours wherever you care to look; so don't just blame the banks for all our ills; however, being critical nodes in the control of finance they should be of the whitest white in all their business; nonetheless, one expects the banks or any other industry for that matter to do their job in an efficient and fair manner however that can be defined to everyones satisfaction.

Self interest is however a powerful driver in whatever the endeavour, industry, banking, politics, personal aspirations; whatever.

That said, I (as a man in the street) regard the libor issue as something of an esoteric matter being the latest political instrument being used with little regard for myself, I shall however endeavour to read it up somewhere to discover why the fixing of inter bank lending rates between consenting parties is improper in some circumstances but not in others. Clearly when the boss of Barcleys feels forced to resign, it must be serious; or perhaps he feels he has just had enough of things; in every meaning of the word.

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an elder one

Jul 10, 2012 at 13:36

A further point, as it comes across to an ignoramus like me, Libor as it stands seems to be an intrinsically corrupt practice in any case.

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Tom Bayley

Jul 11, 2012 at 11:00

An elder one, as far as I understand it Libor is supposed to be arrived at via a market, and one might reasonably assume it's based on real transactions, such as actual inter bank borrowing cost over some recent period. However, this article suggests the rate submissions are merely putative i.e. best guesses at what might be possible in the market.

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Tom Bayley

Jul 11, 2012 at 11:24

Replying to what you said earlier, I think morality is indeed disappearing. The problem seems to be that human behaviour is hard to understand :-) So we've felt the need to break it down to basic principles, and of course we've taken on board a lot of ideas from evolutionary theory. Hence the preoccupation with free markets, competition and game theory, all posited over what is seen as the most basic driver of human behaviour: Self-interest. Morality is then not something we have to worry much about - we can rely on an 'invisible hand' that automatically works for our collective good when we encourage our self-interest to shine. It is all good because it works, and it wouldn't have evolved if it didn't.

Now this may be founded on an element of truth. However it also sounds to me like a religion, and like all religions it has perverted its founding truth. It's rather a lot to go into here, but for me the main flaw lies in the definition of 'self'. Traditional wisdom has always sought to extend the boundary of self, so that we become engaged more widely with 'life', ultimately treating others as ourselves. It has also tried to point to a sense of self that is not purely materialistic. I think that is the direction society is sadly lacking now. The 'self' seems to have become a very narrow thing, directed towards money and hedonistic pleasure. Those things are fine, BTW, but entirely insufficient in themselves as a measure of utility in the game of life.

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an elder one

Jul 11, 2012 at 13:30

Tom Bayley, yes I've gathered your point regarding 'putative' Libor rate submissions and by inference the rates should be strictly via the market to be fair practice. There seemed some doubt that the protocol actually stated that rule, hence my comment 'it seems as it stands to be intrinsically corrupt'. However, like much in debate and commentary one can become lost in semantics; my initial question had been where had the law been broken thus promoting these latest Libor dealings the epithet of crime. So, consulting the dictionary I find a crime is in fact an act 'forbidden by statute' (obviously) or equally one 'injurious to public welfare'; the latter a judgemental matter, hence it becoming a concern for the politicos to address and possible examination by the SFO.

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an elder one

Jul 11, 2012 at 15:31

Tom Bayley, you make interesting points about traditional wisdom and religion; all in the same breath; there perhaps is a source of confusion in the standards of ethics today - I'm no philosopher and as regards religions think myself agnostic. Personally, I have little time for the priesthood and their theologies in most places on the planet, but it is interesting that in this basically (still?) Christian England, in my childhood we were taught Christian ethic said 'do unto others as would one to oneself' or words to that effect; one wonders if we have lost the moral guidance of that through its corruption brought about by such as spurious notions of multiculturism and the excessively liberal notions of rights without equal stress on responsibility, engendered by the ruling elites over recent decades.

We all should not be so hard on the transgressors of today while all around is so morally corrupt; let it be put right.

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John Thorley

Jul 12, 2012 at 14:02

Anthony Winterton, you're so right!

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Tom Bayley

Jul 13, 2012 at 18:55

This very recent video from MoneyWeek might help shed light:

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Anonymous 2 needed this 'off the record'

Feb 06, 2013 at 16:29

If I had a libor tracking mortgage does that mean I got overcharged and if so how doi get my money back?

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Bob saxton

Feb 06, 2013 at 18:49

From the ease with which the banks can pay billions of pounds in fines and millions of pounds in bonuses it seems to me that their real sin is profiteering on a hugh and very remunerative scale. I would like governments to stop this profiteering instead of condoning it so that they (particularly the Americans) can grab huge slices of the pie.

What really irks me is that the greed of banks and governments leaves so little left over for shareholders.

No to tell the truth what irks me is that put cash into RBS on the assurance of

Prudence Brown that it was a well founded bank.

Bob the Electrician.

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Dennis .

Feb 07, 2013 at 15:14

Actually if everyone is trying to manipulate the market , doesn't it sort of cancel out? After all that 's what happens in the stockmarket, where everyone is trying to second guess what others are going to do.

In terms of impact on the man in the street I understand that we are talking fractions of a percent here.

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