At the end of June 2012, news of a further scandal in the banking industry broke – although, there was widespread knowledge about this problem within the industry. One UK bank, Barclays, had fines levied by the US and UK authorities for manipulating a key interest rate index called LIBOR. Other banks are still under investigation.
LIBOR is an important market interest rate indicator because it measures the rate of interest at which banks can lend to each other, although, as the article by Stephanie Flanders shows, it does not necessarily measure the rate of interest at which banks actually do lend to each other. Many other financial contracts are therefore priced using LIBOR. For example, it would be reasonable for a bank to offer a mortgage product with a floating rate of interest of “LIBOR plus 1.5%”. The bank could then be reasonably sure that, whatever happened to central bank interest rates, it could obtain funds at LIBOR to fund the mortgage