LIBOR Set For Change

LIBOR (Libor) stands for the London Interbank Offer Rate and it is a benchmark used to set interest rates around the world, having implications in trillions of Dollars of deals on a daily basis (the value has been estimated to be as much as $300 trillion). LIBOR, as the name suggests, is supposed to reflect the rates that banks would charge each other for loans. It is set in London and is based on a basket of rates from 18 leading international banks under the auspices of the British Banker’s Association (BBA) as an average after the four highest and lowest rates are discarded.

A scandal erupted last summer in which it became clear that several banks had falsified their submissions with the intent of either influencing Libor itself or misrepresenting the financial strength of the bank itself during the worst of the global financial crisis by implying that it was finding it easier to borrow funds than it really was (i.e. implying a lower submission to Libor than market forces dictated). The affair led to record fines in the UK and USA and further eroded public trust in financial institutions.

The BBA has announced a change in Libor procedures which will mean that the banks involved in setting the rate will not be able to see the submission of other members for three months after the rate for a given day is set. Real-time rates will be made available to administrators of Libor, of course. The new system will come into effect on 1st July 2013. It remains to be seen if the changes are sufficient to save the system; the EU announced plans to bring Libor under the control of a Paris-based regulator earlier this week.