Question

How did the LIBOR scandal come about?

PC. This if for 3-unit BA-343 International Banking special study, I need deeper explanation. Thanks

Answer 1

Answer: -

During financial crisis of 2007 and 2008, financial market was in stress, hence financial institution would always want to have safe bets for their investment even in risky speculative markets. Hence, few financial institutions started to understate borrowing costs they reported to LIBOR during credit crisis of 2008. Few economists research observed that these few financial institutions giving understated borrowing cost to LIBOR didn't had any intention to showcase them as efficient financial institution but these institutions were seeking to have huge profits on their large LIBOR interest-rate linked portfolios.

The borrowing understatement of financial institution to LIBOR was first cited in financial publication like Wall Street Journal report in April 2008. Economists also in their publication supported financial publication had reported certain level of manipulation for interest linked LIBOR benefits are carried by Financial institutions. But Bank of International Settlements (BIS) and International Monetary Fund (IMF) countered this by stating the data doesn't support these hypotheses given by financial publication, economist and market participants.

November 2008, Governor of the Bank of the England reported to UK Parliament that financial institution is not actually borrowing at a rate which is LIBOR rate. This was reflection of documents provided by New York Fed President to Bank of England in start of year 2008, to fix LIBOR. The documents gave way to Bank of England to help to identify problems related to LIBOR.

In on-going event, the peak point was reached when an employee from one of the financial institution reported to market that LIBOR are not posted correctly and it was done so as not to get into attention.

These were the few instances that led to deep dive for authorities from US and UK and other European countries to understand the situation for fixing the same resulting in uncovering of LIBOR scandal.