The LIBOR scandal explained

This is the best explanation I’ve seen of what the LIBOR scandal was and why it matters.

Understanding Libor.

Designed by www.accountingdegree.net

For more about how LIBOR works, read on.

How Exactly Are Libor Rates Calculated?

Every year the Foreign Exchange and Money Markets Committee, a part of the British Bankers’ Association, selects ‘panel banks’ using the criteria of volume, activity, credit worthiness, and currency proficiency.  These panel banks are asked how much interest they think they would be charged by other banks if they were to borrow money in certain currencies and over certain periods of time.

The panel banks, or ‘contributor banks’, submit their perceived borrowing rates between 5:00 a.m. and 5:10 a.m. EST to their 3rd party calculating agent, Thomas Reuters.  The contributor banks have software provided by Thomas Reuters to easily submit rates.

Thomas Reuters collects the rate information from all contributor banks, takes out the top 25 percent and bottom 25 percent, and averages the middle 50 percent to be the actual Libor (bbalibor) rate. For example, if 18 contributing banks each submit one rate to be calculated, the top 4 and bottom 4 rates will be dropped and the average of the remaining 10 rates will be calculated.

When Are Libor Rates Published?

Around 12 noon London Time. The rates can be viewed by companies with certain tiers of licensing through the British Bankers’ Association.

Where Can I See the Daily Libor Rates?

You can view them online at websites which are licensed to publish rates. These will not be in real-time; usually there is a slight delay. One example is at: Global Rates.

What Banks Are Involved with Setting the Libor?

Depending on the currency involved with the rate, between 6 and 18 contributor banks.

For example, here are the current 18 panel banks for the U.S. Dollar:

Bank of America

Bank of Tokyo-Mitsubishi UFJ Ltd

Barclays Bank plc

BNP Paribas

Citibank NA

Credit Agricole CIB

Credit Suisse

Deutsche Bank AG

HSBC

JP Morgan Chase

Lloyds Banking Group

Rabobank

Royal Bank of Canada

Société Générale

Sumitomo Mitsui Banking Corporation

The Norinchukin Bank

The Royal Bank of Scotland Group

UBS AG

How Many Libor Rates Are There?

There are 15 separate maturities, with 10 separate currencies for each, equaling 150 different Libor rates.

The lengths of maturity are:

1 day

1 week

2 weeks

1 month

2 months

3 months

4 months

5 months

6 months

7 months

8 months

9 months

10 months

11 months

12 months

The currencies are:

American Dollar – USD

Australian Dollar- AUD

British Pound Sterling – GBP

Canadian Dollar- CAD

Danish Krone – DKK

European Euro – EUR

Japanese Yen – JPY

New Zealand Dollar – NZD

Swedish Krona – SEK

Swiss Franc – CHF

Source: The LIBOR Scandal Explained.

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2 Responses to “The LIBOR scandal explained”

  1. Anne Tanner Says:

    And are the banks listed here the same ones that brought about the scandal?

    Like

    • philebersole Says:

      No, not necessarily. The list is a list of all the banks which set LIBOR rate for U.S. dollar loans.

      Here is a list of banks who’ve been named in a class-action lawsuit by the City of Baltimore, which alleges that LIBOR rigging messed up the interest rate swaps (!!) by which it hoped to reduce borrowing costs.

      Bank of America Corporation; Bank of Tokyo-Mitsubishi UFJ; Barclays Bank PLC; Citibank Group Inc.; Cooperative Central Raiffeiesen-Boerenleenbank B.A.(“Rabobank”); Credit Suisse Group AG; Deutsche Bank AG; Lloyds Banking Group PLC; HSBC Holdings plc; J.P. Morgan Chase & Co.; Royal Bank of Canada; The Norinchukin Bank; UBS AG; and West LB AG.

      Being a defendant in a lawsuit is not of course proof of guilt of anything.

      Like

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