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Definition: LIBOR Scandal
LIBOR scandal refers to series of fraudulent actions taken by banks in connection with LIBOR (London Interbank Offer Rate). LIBOR scandal peaked around 2008 in which banks and other financial institutions were falsely fixing the LIBOR so as to earn extra profits from trades. This was done by different banks colluding together and proving information regarding the interest rates that they will use to calculate LIBOR. Banks also tweaked LIBOR to provide corrupt data regarding their credit worthiness. Evidence suggests that this fraudulent was active since 2005.
Banks are asked to submit their quotation for interest rate that they are paying or expect to pay while borrowing from other banks. The LIBOR is an average interest rate which is calculated as an average of interest rates submitted by major banks in London. It holds an important place when we talk about global finance. It is used for pricing the loans that businesses take or the price that individual pay for mortgages or the rate used for derivative pricing. The LIBOR scandal involved banks understating the interest rates thus keeping the LIBOR artificially low. LIBOR is also an indicator of bank’s health and thus by LIBOR scandal a few banks tried to tweak their correct status of financial strength.