LIBOR

Since 1986, LIBOR (London interbank offered rate) has been the principal reference for short-term interest rates worldwide, used in the pricing of swaps, derivative contracts, commercial loan contracts, etc. It is calculated daily for 10 currencies and 15 short term maturities up to one year, based on the average of interest rate submissions from international banks in London for the rate at which each participant estimates it can borrow in the interbank market (in the case of USD LIBOR, the average from 18 banks, after excluding the highest four and the lowest four). In June 2012 the reliability of LIBOR as a true market rate came into question, as a result of a US regulatory investigation into alleged LIBOR rate manipulation. Evidence seems to show that, before the 2007/8 financial crisis, several participating banks had been making false LIBOR submissions to enhance the profitability of their own trading positions; and that during the financial crisis certain banks were submitting artificially low rates to disguise their true difficulty of funding—possibly with the tacit connivance of regulators. Continuing investigations may result in an overhaul in the way in which the daily LIBOR rate is set.