ET in the classroom: Lens on Libor

The Libor fixing scandal has put an unwelcome spotlight once again on the world of banking and highly paid bankers. The resignation of Bob Diamond, once dubbed as ‘The Real-Life Gordon Gekko’ by a British newspaper, may just be the start of a long list of bankers who could fall on their swords over the interest rate rigging scandal.

What is Libor?

The London Interbank Offered Rate or Libor is an average of how much it would cost banks to borrow from one another. It is derived from a survey of banks by the British Bankers’ Association and not actual transactions. It is done in dollars, euros, yen and Swiss francs.

Why is this rate important?

Trillions of dollars of bonds, derivatives and other financial transactions are benchmarked to Libor. Manipulating it by even 0.01 percentage point could lead to millions of dollars in profits (or losses).

What happens now?

Barclays is in turmoil. Other banks could soon be. Regulators are probing UBS, HSBC, Royal Bank of Scotland, Deutsche Bank, JPMorgan, Citigroup, as well as brokers ICAP and RP Martin Holdings.

And…

If more banks found guilty, regulators may expedite changing the way Libor benchmark is being fixed.