Libor Scandal and the Plight of Big Banks

Libor manipulation can bankrupt sixteen big banks and shake investors’ confidence. Libor rigging involves billions of dollars as profits. The big banks include Bank of America, JP Morgan Chase and Citigroup. While the first rigging case was brought to light in 2012 (Also Read: The LIBOR Fallout – A Big Bank scandal )the scandal dates back to as early as 2007-2008. Ironically, this was the time when the nation was going through its worst financial turmoil.

London Inter-Bank  Offered Rate is known as libor and is the rate banks charge one another for loans in the London market. It acts as a benchmark and as a reference rate for derivatives and loan products., which form a crucial part of the financial system. The 2nd US Circuit Court of Appeals court in Manhattan overturned the case against the 16 big banks. It claims that the big banks had broken anti-trust laws and have manipulated the libor to their own benefit.

Libor rates are calculated for 5 currencies and borrowing periods that range from overnight to one year and are published each business day by Thomson Reuters. Following the scandals, the administration of libor was passed on from British Bankers’ association to Intercontinental Exchange Group (popularly known as ICE). The switch was in line with the recommendation in the Wheatley report of Libor (Final Report).

According to the Wheatley Review, “The BBA should transfer responsibility for LIBOR to a new administrator, who will be responsible for compiling and distributing the rate, as well as providing credible internal governance and oversight. This should be achieved through a tender process to be run by an independent committee convened by the regulatory authorities.

Libor manipulation is one of the many scandals that showcases the irresponsible behavior of big banks. It also highlights the urgency to introduce structural reforms in in big banks

In recent years, the regulatory authorities have become vigilant of the crimes committed by the financial industry. Yet, few face criminal convictions. The multi-billion dollar industry chooses to settle charges by paying huge fines. The banking scandals continue to unfold and not only tarnish the reputation of the banks involved but  have negative repercussions on the entire economy.

© 2016 Deena Zaidi. All rights reserved.

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