What’s Libor and why is it in the news again?
Photo courtesy of Angelos Tzortzinis/Bloomberg via Getty Images.
The European Union Wednesday morning became the latest regulator to fine global financial institutions to settle charges they colluded to rig benchmark interest rates to their benefit.
The 1.7 billion euro fine ($2.3 billion) levied on a group of the world’s biggest banks, including Royal Bank of Scotland and Deutsche Bank, marks the heaviest fine European competition authorities have ever issued. It’s also the first time that two American institutions — JPMorgan Chase and Citigroup — were fined in this rate-fixing scheme.
This all-important benchmark interest rate is what’s called Libor — the London Interbank Offered Rate. Simply put, it’s the rate at which banks lend to other banks. And the individual banks determine what it will be each day by reporting how much they’d pay other banks; those rates are then averaged to arrive at that day’s Libor. The rate is used to set interest rates for trillions of dollars of loans.
But here’s where the foul play comes in. Banks weren’t reporting those borrowing rates honestly. The bank submitters (those submitting the borrowing rates) were incentivized by the bank’s traders to manipulate the rates they reported with the intention of boosting the bank’s profits for all of its employees’ benefit. (Read Wall Street money manager Doug Dachille’s argument about why the Libor scandal is not such a big deal on the Business Desk).
American and British regulators already fined British bank Barclays for fixing Libor 18 months ago. As the Wall Street Journal’s David Enrich explained to NewsHour’s Margaret Warner back in 2012 (below), initially, Barclays was getting all the blame, but everything pointed to their rate-fixing being part of a much more widespread practice.
The NewsHour explored what Libor is and how it was manipulated in this segment with The Wall Street Journal’s David Enrich.
Since then, five financial institutions have admitted they were involved and paid a total of $3 billion in fines to various regulators like the U.S. Securities and Exchange Commission.
Wednesday’s settlement is significant because EU authorities typically lack strong enforcement power over financial firms whose oversight is usually left to individual countries. At the same time, however, the settlement underscores the EU’s relative impotence, compared to the SEC, especially their inability to bring criminal charges against financial institutions.