The LIBOR Scandal #1

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Hi, this is Tony with my very first post here! Do you guys know what a LIBOR interest rate is?

LIBOR is an abbreviation for London Interbank Offered Rates. LIBOR is a short-term interest rate used by banks located in London financial markets. These first-class banks have excellent reliability. Now, you might think that the LIBOR rates are only used in London, but it’s not! This rate is used internationally, mostly in cases of trans-border financial transactions.

So, how does this rate work basically?

When the reliability is low, several percents of spread are added. This spread (added interest rate) is the commission revenues of financial companies.

Now, you should know what a LIBOR rate is. The reason why I introduced about LIBOR rate is because a financial crime that have used LIBOR rate has became an international scandal recently.

Barclay’s, England’s second biggest bank (IB) was convicted of a financial crime using LIBOR rates to earn unjust profit. This led Barclay’s president, Bob Diamond to resign and has brought a huge controversy throughout England and the international society.

The thing found in the investigation ordered by UK’s Prime Minister David Cameron is that Barclay’s and 15 other English banks have been manipulating the LIBOR rate to earn unjust profit. But the biggest issue brought out from the investigation is that the crimes were conducted under the protection of government officials!

Can you imagine that?

Even the president of Bank of England, Mervyn King and Minister of Finance, Osborne has taken parts in this matter!

LIBOR is officially notified everyday by borrowing rates of 16 major banks of England. The BBA (British Bankers Association) exempts the maximum and minimum rates and then, averages the rates. As I have told you ahead, LIBOR rate is calculated by averaging the rates of 16 distinctive banks! So this means that it is impossible for the Barclay’s to commit the crime alone. Five directors of Royal Bank of Scotland got fired, and lots of investigations are going on. It seems that this problem would not end as England’s conflict alone. Lots of banks seem internationally associated with this conflict. This is why financial supervisory service-related agencies around the world are going through its own domestic investigations.

In the next article, I will point out the background information about the crisis.

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