The Libor rate-rigging scandal has dogged the banking sector for the past six years.
Many billions of dollars have been paid out in penalties over allegations involving numerous financial institutions. Investigations into Libor rigging have been pursued by regulators and law enforcement authorities across the world.
Finally, the UK´s Financial Conduct Authority (FCA) has announced plans to ditch Libor, deeming it as “unsustainable and undesirable”.
Libor, or London Interbank Offered Rate, is the most commonly used global benchmark for the rate at which banks make short-term loans to one another.
Some 35 separate Libor rates are generated everyday across varying currencies and maturities. The most widely used of these is the three-month Libor rate in US dollars.
The FCA, however, has now called time on this money market rate. It wants Libor gone by the end of 2021 and replaced with alternative benchmarks that give a more accurate reflection of the short-term lending rates in the market.
The general reputation of Libor has been somewhat tarnished over recent years. Since the scandal was uncovered in 2012, around $9bn in penalties have been paid by major global banking names, which include the likes of Deutsche Bank, UBS, RBS and Barclays.
One of the UK-based traders who was found guilty of participating in the fraud is currently serving an 11-year jail sentence.
Regulators and prosecutors found that some individuals had sought to manipulate Libor rates to favour their trading positions.
They also found that some banks had been deliberately reporting unduly low Libor rates to make their own businesses look stronger in the midst of the financial crisis.
End of the line
In a speech last week, FCA chief executive Andrew Bailey said the regulator had decided it was the end of the line for Libor, not because of any further foul play but because interbank lending is no longer as big an activity as it once was.
“It is not only potentially unsustainable, but also undesirable, for market participants to rely indefinitely on reference rates that do not have active underlying markets to support them,” said Bailey.
According to Bailey, despite efforts to beef up the way Libor is calculated, banks are still having to use judgement to come up with the appropriate rates.
In his speech, the FCA boss gave an example where one of the Libor rates calculated each business day was created using submissions from a dozen banks, but who between them only completed 15 transactions within the corresponding currency and maturity segment during the whole of 2016.
The good news is that this indicates banks have largely ceased to fund themselves through unsecured, short-term interbank lending.