Ever since the financial crisis, there have been doubts about the functioning of the London interbank offered rate, a benchmark for hundreds of trillions of financial instruments and contracts worldwide. These have centred on fears that the rate might have been manipulated by the banks that participate in setting it.
On Wednesday, Barclays was fined more than $450m by British and US regulators, after admitting to attempting to manipulate Libor. While Barclays is not the first bank to be fined over similar allegations, its settlement is much bigger than past ones. Nor is it likely to be the last: investigations into interest-rate rigging involve regulators from three continents, looking at more than 20 banks involved in the rate-setting process.
Libor works on the assumption that banks submit an honest assessment of the rate at which they believe they can borrow on a given day. But, as the Barclays settlement shows, the bank’s submissions were over a long period tainted by self-interest – whether to help some of its derivatives traders or out of a desire to protect its reputation in the market. The watchdogs found that some of the rigging had been done to paint a rosy picture of the bank’s funding costs at times of stress.