LIBOR or ICE LIBOR is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It stands for Inter-continental Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. LIBOR is administered by the ICE Benchmark Administration (IBA), and is based on five currencies: U.S.dollar (USD), Euro (EUR), pound sterling (GBP), Japanese Yen (JPY) and Swiss franc (CHF), and serves seven different maturities: overnight, one week, and 1,2,3,6 and 12 months. There are a total of 35 different LIBOR rates each business day. The most commonly quoted rate is the three-month U.S dollar rate.
A total of 35 rates are posted every business day (number of currencies * number of different maturities), with the 3-month U.S. dollar rate being the most common one. This is usually referred to as the “current LIBOR rate”.
LIBOR or ICE LIBOR primary function is to serve as the benchmark reference rate for debt instruments, including government and corporate bonds, mortgages, student loans, credit cards; as well as derivatives such as currency and interest swaps, among many other financial products.
Since the rates submitted are estimates, not actual transactions, it has been suggested that banks could have submitted false figures. It is alleged that traders at several banks conspired to influence the final average rate that results, the official LIBOR rate, by agreeing amongst themselves to submit rates that were either higher or lower than their actual estimates.
During the past three years Barclays Bank, JP Morgan, Swiss Bank UBS, Royal Bank of Scotland and Deutsche Bank have all been fined by financial regulators for this practice, which is seen as market manipulation and corrosive to trust in the financial markets.
After the allegations came to light the government commissioned a major review of LIBOR and how it was set. Rates are now based on actual transactions for which records are kept. Another key change is that there are now specific criminal sanctions for manipulation of benchmark interest rates.