A new era is approaching that will transform global financial industries on a scale rarely seen before.
LIBOR rates are benchmark rates reflect the interest rate that banks pay to borrow money from each other. They are used to calculate everything from the interest rates that large corporations pay for loans, to the rates individual consumers pay for everything from student loans to home mortgages, as well as being used in derivative pricing.
The most widely used benchmark, LIBOR, in effect underpins contracts impacting banks, insurers, asset managers, and other corporations with an estimated worth of up to USD 350 trillion globally.
Rather than being founded on a single interest rate, the LIBOR is calculated by an array of them, based on different currencies and loan durations. It is produced for five currencies (CHF, EUR, GBP, JPY, and USD) based on submissions from a reference panel of several banks for each currency. This results in the creation of 40 rates each business day.
Certain currencies also use specific benchmarks, including the Hong Kong Interbank Offered Rate (HIBOR) for the Hong Kong Dollar.
Yet despite being one of the most significant reference rates used in the financial markets, the last financial crisis shone a bright light on its inadequacies. The 2012 LIBOR scandal involved a scheme by several banks to report artificially low or high interest rates to the benefit of their derivatives traders.
As the LIBOR is further used as a broad indicator of a financial institution’s health, many of them were also able to make themselves appear stronger than they were, by reporting fictitious rates. Evidence suggested that this collusion had been taking place since, at least, 2005.