What Was the LIBOR Scandal? What Happened and Impacted Companies

What Was the LIBOR Scandal?

The LIBOR scandal was a highly-publicized scheme in which bankers at several major financial institutions colluded with each other to manipulate the London Interbank Offered Rate (LIBOR). The scandal sowed distrust in the financial industry and led to a wave of fines, lawsuits, and regulatory actions. Although the scandal came to light in 2012, there is evidence suggesting that the collusion in question had been ongoing since as early as 2003.

Many leading financial institutions were implicated in the scandal, including Deutsche Bank (DB), Barclays (BCS), Citigroup (C), JPMorgan Chase (JPM), and the Royal Bank of Scotland (RBS).

As a result of the rate-fixing scandal, questions around LIBOR's validity as a credible benchmark rate were raised. It was fully phased out on June 30, 2023. It was replaced by the Secured Overnight Financing Rate (SOFR). 

Understanding the LIBOR Scandal

The LIBOR was a benchmark interest rate that was used for the pricing of loans and derivative products throughout the world. It was formed using reference interest rates submitted by participating banks. During the LIBOR Scandal, traders at many of these banks deliberately submitted artificially low or high interest rates in order to force the LIBOR higher or lower, in an effort to support their own institutions’ derivative and trading activities.

The LIBOR was used to determine everything from the interest rates that giant corporations will pay for loans, to the rates individual consumers will pay for home mortgages or student loans. It was also used in derivative pricing. Therefore, by manipulating the LIBOR, the traders in question were indirectly causing a cascade of mispriced financial assets throughout the entire global financial system. Understandably, this led to a substantial public backlash, as parties throughout the world wondered whether they may have been harmed financially.

Public outrage at the scandal was further exacerbated by the apparent brashness of many of the actors involved. This became evident as emails and phone records were released during investigations. Evidence showed traders openly asking others to set rates at a specific amount so that a particular position would be profitable.

Regulators in both the United States and the United Kingdom levied some $9 billion in fines on banks involved in the scandal, as well as a slew of criminal charges. Because LIBOR was used in the pricing of many of the financial instruments used by corporations and governments, they also filed lawsuits, alleging that the rate-fixing negatively affected them.

Following the exposure of the LIBOR collusion, Britain’s Financial Conduct Authority (FCA) took the responsibility for LIBOR supervision away from the British Bankers Association (BBA) and turned it over to the Intercontinental Exchange's Benchmark Administration (IBA). The IBA is an independent U.K. subsidiary of the private U.S.-based exchange operator, Intercontinental Exchange (ICE).

The Bottom Line

Ultimately, the LIBOR scandal left many changes in its wake. The New York Federal Reserve launched a LIBOR replacement in April 2018 called the Secured Overnight Financing Rate (SOFR), which is based on short-term loans observed in the repo market. (Unlike the LIBOR, there’s extensive trading in Treasury repos, theoretically making it a more accurate indicator of borrowing costs. Moreover, the SOFR is based on data from observable transactions rather than on estimated borrowing rates, as was sometimes the case with LIBOR.) In December 2022, the Federal Reserve Board adopted a final rule that used benchmarks based on SOFR. On June 30, 2023, LIBOR was fully phased out.