Libor benchmark: practice, crime and reforms

DOIhttps://doi.org/10.1108/JFC-09-2015-0044
Date03 October 2016
Pages1140-1153
Published date03 October 2016
AuthorPeter Yeoh
Subject MatterAccounting & Finance,Financial risk/company failure,Financial crime
Libor benchmark: practice,
crime and reforms
Peter Yeoh
School of Law, Social Sciences and Communications,
University of Wolverhampton, Wolverhampton, UK
Abstract
Purpose – The purpose of this paper is to trace how and why the market-designed Libor benchmark
turned bad, thereby necessitating a regulatory response.
Design/methodology/approach – The study relies on primary and secondary data in the public
domain and complemented by a single-case study.
Findings – The study demonstrates how and why Libor benchmark rigging led to reforms in the UK
and elsewhere.
Research limitations/implications – The study relying mainly on the secondary data analysis
needs to be enhanced by further empirical-based studies.
Practical implications – Insights generated by the study suggest why it might not be worthwhile
for market participants to game the system.
Social implications Libor benchmark affects the nancial system widely with varying
signicance to the wider public. With better regulatory oversight, its negative impact is expected to be
mitigated considerably.
Originality/value – The seriousness with which the enforcement agency and judiciary now treat
nancial crime weakens the earlier public perception that white-collar crime is enforced differently.
Keywords UK, Financial crime, Libor, Libor manipulation, Wheatley Report
Paper type Research paper
Introduction
The London Interbank Offered Rate (Libor) is the reference rate at which major banks
signal that they could borrow unsecured short-term wholesale funds from each other in
the interbank market. This benchmark interest rate is set in the city of London.
Primarily, it is one of the main rates used to ascertain the borrowing costs of nancial
transactions such as credit cards, student loans and mortgage accounts, estimated at
some US$450tn to US$800tn (Wheatley Report, 2012). These rates generally move in
tandem with the uctuations in Libor rates and are usually adjusted quarterly or
annually rather than daily. Banks loan and borrow substantially from each other,
relying on their submissions for xing the rate at which they contract, especially in the
mid-1980s. This created the incentive to understate the funding costs.
The British Bankers’ Association (BBA) responded by taking charge of the rate in
1986 to tidy up the data collection and governance process. It commenced publishing
this standard benchmark in early January 1986 for the US, UK and Japanese currencies.
Over time, more currencies were added with different maturity terms. Hence, instead of
constantly bargaining over the interest rates being charged for different kinds of loans,
Libor would provide this uniform benchmark. The Libor panel banks usually comprised
the larger and more creditworthy ones.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
JFC
23,4
1140
Journalof Financial Crime
Vol.23 No. 4, 2016
pp.1140-1153
©Emerald Group Publishing Limited
1359-0790
DOI 10.1108/JFC-09-2015-0044

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