Lloyds Banking Group Fined £218m Over Libor

Rate-Fixing Scandal: What Is Libor?

Updated: 3:07pm UK, Wednesday 06 February 2013

By Ursula Errington, Business Reporter

Every day the banks borrow and lend money to each other as trades are done in all sorts of markets like equities and commodities.

The interest rate they charge each other is called the London Interbank Offered Rate or Libor.

It is set every morning at 11am at the British Bankers Association.

A panel of banks put forward the rate of interest they believe they would have to pay to borrow money across ten currencies for loans ranging from a matter of hours to a year.

The figures are listed in descending order and split into four sections.

Rates in the top and bottom sections are discarded and it's the mean of the middle two sections that determine the benchmark rate.

So how could it be tampered with?

Well, we know traders at banks including Barclays and RBS were influencing the bankers submitting the rates - asking for them to be higher or lower depending on their trading position.

If there was wider collusion too with other submitters, you can soon see how the mean of those figures could be manipulated.

Since Libor underpins trillions of pounds in derivatives, a trader who knows which way it's going to go, could make tens of millions of pounds on a single transaction.

The rate submitted is also a reflection of an institution's credit worthiness in the market.

So if it's low, the perception is - this bank is a safe bet to pay it back.

The implication is that during the 2008 bank crisis the rate may have been manipulated to make some banks look healthier than they were.

It affects ordinary people because it's used to help calculate interest rates on everyday products like credit cards and mortgages.

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