An estimated $300tn (£192tn) of contracts are based on Libor.
Libor first shot to prominence during the financial crisis when it emerged as a signal that banks were panicking. This is because Libor – shorthand for the London interbank offered rate – is the price at which banks estimate their rivals will want to lend to them. During the crisis, those banks that admitted they expected to be charged the highest interest rates by their peers were perceived to be the riskier ones.
The £290m fine for rigging the rate imposed on Barclays in 2012 showed Libor in an entirely different light. The penalty and subsequent ones imposed on other banks and brokers showed that the rates themselves were being manipulated. It also meant they may not have been a true reflection of wider borrowing costs paid by companies and households worldwide.
As well as being a vital measure for banks, Libor was used as a benchmark to price a wide range of financial products. An estimated $300tn (£192tn) of contracts are based on Libor, setting borrowing rates for businesses and consumers from Sydney to New York and London.
Following the rigging scandals, the process of calculating Libor was overhauled. During the period when the rate was being manipulated, a panel of banks made submissions about the price that they expected to be charged to borrow across 15 timescales – from overnight to one year – and in 10 currencies, including sterling, yen and US dollars.
They were asked: “At what rate could you borrow funds, were you to do so by asking for, and then accepting, interbank offers in a reasonable market size just prior to 11am?”
The British Bankers’ Association had been associated with setting Libor since 1986 but is now no longer involved in compiling the rates after relinquishing the role last year. In the wake of the rigging scandals, Libor is now overseen by the body which runs the New York Stock Exchange.
Other changes have also been made. The number of included currencies has been cut to five and the rates published over seven borrowing periods, and publication of the rate is delayed.
This article was written by Jill Treanor, for theguardian.com on Monday 3rd August 2015 15.16 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010