BBC News - Libor what is it and why does it matter?

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BUSINESS
18 December 2012 Last updated at 09:21 GMT

Libor what is it and why does it matter?

Libor, the London inter-bank lending rate, is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest, and the exposure of its rigging has shocked many beyond the world of finance. Here, the BBC explains some of the key facts.

1. What is Libor?
A global benchmark interest rate used to set a range of financial deals. It is also a measure of trust in the other's financial health. Mortgages Loans Inter-bank lending Indicator of

2. Why is it important?

The Libor, or London Interbank Offered Rate, is used to set a range of financial transactions worth an estimated $30

$300,000,000,000
Which is equivalent to approximately four

and a half times global GDP

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3. How is it set?
Every day a group of leading banks submit rates for 10 currencies and 15 lengths of loan ranging from overnight to 12 months. The most important is the three-month dollar Libor. The rates submitted are what the banks estimate they would pay other banks to borrow dollars for three months. This is a simple example of how it works. Banks submit their rates

1%

The top and bottom quartiles are discarded1% An average is calculated of the remainder

2.5%

4. How was it rigged?

By traders
Since the rates submitted are estimates not actual transactions it's relatively easy to submit false figures. Traders at several banks conspired to influence the Libor by getting colleagues to submit rates that were either higher or lower than their actual estimate. Banks

Libor and the financial

At the height of the financial crisis in lending to each other over banks submitting much higher

Barclays was one of those submittin media attention. This prompted com

Following much internal debate and Bank of England official, Barclays b can see this in the graph below whi submitted by Barclays.

1% 1%

2% 2%

3% 3%

4% 4%

2.5% Lower average

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Barclays' Libor 3-month sterling

2% 2%

3% 3%

4% 4%

5% 5%

3.5% Higher average

5. Consequences
While those paying interest on loans would have benefited from lower Libor rates, savers and investors would have lost out. Regulators in Canada, US, Japan, Switzerland, Britain are investigating the rate rigging.

The Libor scandal has further undermined trust in banks. The deputy governor of the Bank of England called the Libo

Note: The estimated figure for the value of transactions connected to Libor has been revised down from $800 trillion following new figures in the Wheatley report on 28 September 2012.

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