LIBOR - calculation and manipulation
LIBOR, which stands for the London InterBank Offered Rate, provides a measure of how much large banks would have to pay to borrow money from other large banks on an unsecured basis. Banks rely on this money to lend to customers and businesses and so it is a vital indicator of confidence in the banking system.
It is the most common reference base for pricing interest rate sensitive instruments (e.g. it is the key rate in the interest rate swap market, whilst corporate loans and even some adjustable rate residential mortgages
are pegged to LIBOR).
LIBOR has hit the headlines recently following the £290m fine imposed on Barclays by the Financial Services Authority along with US regulators, after an investigation found they had been attempting to manipulate the level of LIBOR.
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