Libor: What is it and why does it matter?

Left In Alabama - Front Page. The rates submitted are what the banks estimate they would pay other banks to borrow dollars for three months if they borrowed money on the day the rate is being set. The Warren Buffett Blog.


This is a simple example of how it works. Since the rates submitted are estimates, not actual transactions, it has been suggested that banks could have submitted false figures. It is alleged that traders at several banks conspired to influence the final average rate that results, the official Libor rate, by agreeing amongst themselves to submit rates that were either higher or lower than their actual estimates.

During the past three years Barclays Bank, JP Morgan, Swiss bank UBS, Royal Bank of Scotland and Deutsche Bank have all been fined by financial regulators for this practice, which is seen as market manipulation and corrosive to trust in the financial markets. In August , former city trader Tom Hayes was convicted of conspiracy to defraud for manipulating Libor. He was jailed for 14 years a sentence that had since been cut to 11 years.

After the allegations came to light the government commissioned a major review of Libor and how it was set. Rates are now based on actual transactions for which records are kept. Another key change is that there are now specific criminal sanctions for manipulation of benchmark interest rates. What is it and why does it matter?

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