Average rate at which banks loan to one

another

• Banks in London, can exchange money between banks. LIBOR is the rate at which banks borrow funds from other banks in the London interbank market.

• It is usually abbreviated to LIBOR or to BBA Libor (for British Bankers' Association Libor)

Background

Standard interbank products

Commercial field products

Hybrid Products

Forward rate agreements

Floating rate notes Range accrual notes

Interest rate futures Floating rate certificates of deposits

Step up callable notes

Interest rate swaps Syndicated loans Target redemption notes

Swap options Term loans Hybrid perpetual notes

• Primary benchmark for short term interest rates globally• Used as the basis for settlement of interest rate contracts on

many futures and options exchanges.• It is used in many loan agreements throughout global

markets.• Is also considered a barometer to measure the health of

financial money markets.

• LIBOR is used as the base rate for a large number of financial products such as futures, options and swaps

• Banks also use the LIBOR interest rates as the base rate when setting the interest rates for loans, savings and mortgages

Process

• Libor rates are calculated for ten currencies and 15 borrowing periods .

• Every day, Thomson Reuters calculates and distributes the set of benchmark rates known collectively as LIBOR.

• Each day between 1100 and 1110 hrs London time, banks contributing to the LIBOR-setting process send their interbank borrowing rates directly and confidentially to Thomson Reuters.

• Thomson Reuters undertakes checks, discards the highest and

lowest contributions (the top and bottom quartiles)

• This process is followed (or ‘maturities’) in which the LIBOR rate is set.

• These figures are then distributed by Thomson Reuters by midday London time.

• Thomson Reuters makes public all contributions, including the outliers in the top and bottom quartiles, and these can be seen on a range of financial vendor screens around the world.

Banks submit their rates 1% 2% 3% 4%

The top and bottom quartiles are discarded

1% 2% 3% 4%

An average is calculated of the remainder

2.5%

• Not necessary• Submitted by a panel with high credit ranking• Bank with less standing may have to pay higher than

published rate.

• LIBOR rates are widely used as a reference rate for financial instruments such as:

• Forward rate agreements• Short term interest rate future contracts• Interest rate swaps• Floating rate notes• Syndicated loans• Variable rate mortgages • Currencies, especially the US $

They thus provide the basis for some of the world's most liquid and active interest rate markets.

•The scandal arose when it was discovered that banks were falsely inflating or deflating their rates.•Because Libor is used in U.S. derivatives markets, an attempt to manipulate Libor is an attempt to manipulate U.S. derivatives markets, and thus a violation of American law.

• 2005 :- Barclays tried to manipulate the LIBOR and EURIBOR• 2007 :- Onset of downturn, Barclays manipulated rates to

show good credit quality of bank, Libor submission was on higher side

• 2008 :- Barclays officer reported, bank not reporting correct rates.

• 2009 :- BBA circulated guidelines submission of rates, which Barclays doesn’t follow

• 2011 :- RBS sacked 11 employees for attempt of manipulating the LIBOR

• 2012 :- Barclays agreed and penalty has been charged. While in 2010 they committed they are following new fundamental rules. Stock sees 15% downside

• It can have negative effects on consumers and financial markets worldwide.

• The rates banks pay to borrow money affect how much they charge for customers for loans and mortgages.

• Many banks worldwide use Libor as a base rate for setting interest rates on consumer and corporate loans.

• Indeed, over $800 trillion in securities and loans are linked to the Libor, including auto and home loans.

• When the Libor rises, rates and payments on loans often increase and vice versa.

• The Libor "is used for an increasing range of retail products like mortgages, loans, basis for settlement of interest rate contracts on many of the world's major futures and options exchanges.

• 45 percent of adjustable-rate prime mortgages and 80 percent of adjustable-rate subprime mortgages are based on the Libor, while half of variable-rate private student loans are set to the Libor.

• Indian companies raised more than 104.4 $billion until march 2012 through external commercial borrowings which is linked to LIBOR.

• Banking regulators across the world were affected after Barclays was fined 290 million pound