Libor’s uncertain future
Skip to content
Mar 14, 2012

Libor’s uncertain future

By Tim De Chant

Libor logo

Libor is in a spot of trouble. The economic indicator, which stands for London Interbank Offered Rate, is widely watched as a measure of credit risk in the economy. But it has also been the subject of investigations by regulators in the United States, Japan, the United Kingdom, and the European Union. Libor is supposed to be free from abuse, but the investigations suggest otherwise.

First introduced in 1985 by the British Bankers’ Association, Libor influences rates on everything from credit cards to mortgages to financial products. Every morning, a panel of banks submit “bids” that detail the rate at which they feel they could borrow money in various currencies. What gets reported is the interquartile mean, or the average of the middle 50 percent of those bids.

The problem is that the process of submitting those bids is not entirely transparent. Since many financial instruments are tied to Libor, traders at some banks apparently tried to influence the indicator by misreporting their bids to boost their profits.

“Libor is a standard reference rate used to construct and settle trillions of dollars worth of contracts annually,” said Robert McDonald, a professor of finance. “Manipulation of the rate is an embarrassment for the banks and the regulators, will undoubtedly lead to lawsuits, and undermines the integrity of the financial system.”

As such, the BBA is considering changing the way Libor is calculated to avoid similar problems in the future. They say it is part of a regular review of the indicator, but the scandal undoubtedly has something to do with it.

The overhaul is something of a tacit admission that Libor is manipulable, something which BBA has previously denied. Despite that, McDonald says the rethink won’t hurt the measure any more than the scandal already has.

A future without Libor is difficult to imagine. According to a government bond trader interviewed by the Financial Times, “If you want a figure for term interbank rates, you have to use the Libor survey because there are no or very few actual trades.”

Still, if Libor does fall out of favor, McDonald is certain something will take its place. “People would latch onto or construct something,” he said. What’s less certain is what that something will be.


Editor’s Picks

A mentor puts capes on mentees.

Podcast: How to Be a Great Mentor

Plus, some valuable career advice that applies to just about everyone.

Kids decide whether to buy water or soda.

A New Way to Persuade Kids to Drink More Water and Less Soda

Getting children to make healthy choices is tricky—and the wrong message can backfire.

Computational Social Scientists discuss solutions.

How Can Social Science Become More Solutions-Oriented?

A conversation between researchers at Kellogg and Microsoft explores how behavioral science can best be applied.

An entrepreneur enters an established company.

Buying a Company for Its Talent? Beware of Hidden Legal Risks.

Acquiring another firm’s trade secrets—even unintentionally—could prove costly.


Take 5: Tips for Widening—and Improving—Your Candidate Pool

Common biases can cause companies to overlook a wealth of top talent.

Drug innovation at a pharmaceutical company

Everyone Wants Pharmaceutical Breakthroughs. What Drives Drug Companies to Pursue Them?

A new study suggests that firms are at their most innovative after a financial windfall.

How to be prepared

4 Key Steps to Preparing for a Business Presentation

Don’t let a lack of prep work sabotage your great ideas.

Healthcare workers meet in a hospital corridor.

Video: How Open Lines of Communication Can Improve Healthcare Outcomes

Training physicians to be better communicators builds trust with patients and their loved ones.

A man tries to improve OR scheduling.

Here’s a Better Way to Schedule Surgeries

A new tool could drive savings of 20 percent while still keeping surgeons happy.

Voters who do not trust each other.
Politics & Elections

Why Economic Crises Trigger Political Turnover in Some Countries but Not Others

The fallout can hinge on how much a country’s people trust each other.

A clerk scans brand trademarks.

Building Strong Brands: The Inside Scoop on Branding in the Real World

Tim Calkins’s blog draws lessons from brand missteps and triumphs.

Two coffee growers harvest safely

How the Coffee Industry Is Building a Sustainable Supply Chain in an Unstable Region

Three experts discuss the challenges and rewards of sourcing coffee from the Democratic Republic of Congo.