New Book Reveals Alleged Pressure from Central Banks and Governments to Manipulate Libor Rate
According to a forthcoming book titled “Rigged” by BBC economics correspondent Andy Verity, banks were purportedly coerced by central banks and governments into manipulating the London Interbank Offered Rate (Libor) in an effort to instill confidence in the financial sector.
Serialized in The Times, the book claims that regulatory bodies and prosecutors were aware of this pressure but concealed it during the prosecution of individuals accused of rigging the rate. Verity’s comprehensive account will be released next week. Libor serves as a benchmark interest rate that signifies borrowing costs between banks. Verity alleges that central banks pressured banks to establish artificially low rates to assuage panic in the financial markets.
Verity argues, “The evidence suggests that in October 2008, central banks such as the Bank of England, the Banque de France, the European Central Bank, Banca d’Italia, Banco de Espana, and the Federal Reserve Bank of New York intervened extensively in the setting of Libor and Euribor.”
The author claims that despite being informed of these actions, regulators withheld the information from lawmakers and the general public. These allegations raise concerns about both the potential scapegoating of individual bankers and the misleading of parliamentary committees regarding the extent of the state’s involvement.
The Serious Fraud Office (SFO) in the UK convicted a total of nine traders, including former UBS and Citigroup trader Tom Hayes, for their roles in manipulating Libor. However, according to Verity, jurors in these criminal trials were never presented with evidence regarding the alleged involvement of governments and central banks. Verity also alleges that the Treasury Select Committee was not provided with this evidence.
In response to today’s report, David Davis, speaking in Parliament last week, expressed concerns that “the Treasury Select Committee may have been misled by state agencies about the knowledge and involvement of the state in setting false rates.”
The Serious Fraud Office disputes the claim that any bankers were scapegoated. A spokesperson stated, “The Serious Fraud Office secured the convictions of nine individuals for rate-rigging; all either pleaded guilty or were found guilty by a jury. A number of those convictions have been reviewed by the Court of Appeal and all have been upheld.”
The Bank of England labeled the claims as “unsubstantiated,” while a spokesperson from the Financial Conduct Authority (FCA) mentioned that the inappropriate Libor submissions were extensively investigated a decade ago, including in a review published by the FSA that remains publicly available.
What Was the LIBOR Scandal?
The notorious LIBOR Scandal involved collusion among bankers from several major financial institutions to manipulate the London Interbank Offered Rate (LIBOR). This scandal had far-reaching consequences, leading to substantial fines, numerous lawsuits, and regulatory interventions. Although the scandal became public in 2012, evidence suggests that the collusion had been ongoing since as early as 2003.
Prominent financial institutions implicated in the scandal include Deutsche Bank (DB), Barclays (BCS), Citigroup (C), JPMorgan Chase (JPM), and the Royal Bank of Scotland (RBS).
Due to the rate-fixing misconduct, serious doubts have been raised about the credibility of LIBOR as a benchmark rate, resulting in its phased-out removal. As per the Federal Reserve and UK regulators, LIBOR will be completely phased out by June 30, 2023, and will be replaced by the Secured Overnight Financing Rate (SOFR). As part of this process, LIBOR’s one-week and two-month USD LIBOR rates will cease to be published after December 31, 2021.
Understanding the LIBOR Scandal: A Global Benchmark Rate Undermined
The LIBOR, a benchmark interest rate utilized worldwide for loan and derivative product pricing, came under scrutiny during the LIBOR Scandal. Traders at various participating banks purposefully submitted artificially high or low interest rates to manipulate the LIBOR, influencing their own institutions’ derivative and trading activities.
The significance of the LIBOR scandal stems from its pivotal role in global finance. This rate determines interest rates for corporate loans, consumer mortgages, student loans, and even impacts derivative pricing. By manipulating the LIBOR, the implicated traders triggered a ripple effect of mispriced financial assets throughout the global financial system, prompting a substantial public backlash and raising concerns about potential financial harm suffered by individuals and organizations.
Adding fuel to the fire, the scandalous actions of the involved individuals became evident through the release of incriminating emails and phone records during investigations. These records revealed traders openly requesting specific rate settings to ensure the profitability of particular positions. Both US and UK regulators imposed fines totaling around $9 billion on the banks involved, along with a slew of criminal charges. Corporations and governments, affected by the rate-fixing’s impact on the pricing of their financial instruments, also initiated lawsuits alleging negative repercussions.
The LIBOR scandal shed light on a breach of trust in a globally influential benchmark rate, fueling public outrage and prompting widespread calls for reform and increased accountability.
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Assessing the Impact and Repercussions of the LIBOR Scandal
Determining the specific individuals affected by the LIBOR scandal is challenging, but its ramifications have the potential to be widespread. For instance, homeowners who secured fixed-rate mortgages during a period when mortgage rates were artificially inflated due to manipulated LIBOR rates might have experienced additional expenses. From their perspective, every extra dollar paid due to these inflated rates could be seen as a form of “theft” committed by those involved in the LIBOR rate manipulation. Similarly, traders involved in derivative contracts could have incurred significant losses unnecessarily as a consequence of the scandal.
In the aftermath of the LIBOR scandal, substantial changes were implemented. The Financial Conduct Authority (FCA) in the UK, following the exposure of LIBOR collusion, transferred the responsibility of LIBOR supervision from the British Bankers Association (BBA) to the Intercontinental Exchange’s Benchmark Administration (IBA). The IBA, an independent UK subsidiary of the US-based exchange operator Intercontinental Exchange (ICE), is now responsible for overseeing LIBOR, which is commonly referred to as ICE LIBOR.
Furthermore, the FCA has announced its intention to support LIBOR only until 2021, after which it aims to transition to an alternative system. The New York Federal Reserve introduced a possible replacement for LIBOR called the Secured Overnight Financing Rate (SOFR) in April 2018. SOFR is derived from short-term loans observed in the repo market, where Treasury repos experience extensive trading—approximately 1,500 times more than interbank loans as of 2018. This characteristic theoretically positions SOFR as a more accurate indicator of borrowing costs. Moreover, unlike LIBOR, SOFR relies on data from actual transactions rather than estimated borrowing rates, addressing a potential source of uncertainty associated with LIBOR.
