LIBOR Manipulation in Developed Markets

Abstract

This article focuses on the LIBOR manipulation scandal officially revealed by the U.S. and U.K. authorities in June 2012. The article indicates that this scandal is in reality an outcome of the financial efficiency problem in the developed markets along with other reasons. LIBOR is a widely used money market benchmark rate in the world. Many financial transactions and instruments are based on the LIBOR. Therefore, these rates have to be real and be calculated genuinely. Manipulation of the LIBOR would mean manipulation of all financial markets and distorting the whole trust and integrity. The fines imposed on the actor of the manipulation by the U.S. and U.K. authorities are the sign of how big the scandal. As the reports of the CFTC and the FSA implied, this scandal directly or indirectly caused unintentional and unfair wealth transfers among the market participants. Therefore, the actor or actors of the scandal must be responsible of all losses of all victims. Thus, victims should have the right of the suing the actors of the scandal and requesting the amount of their loss. These actions of market participants may decrease similar scandal risks and increase the integrity of the financial markets. This article also shows the weakness of the calculation method for the LIBOR. Even though the British Bankers Association claims that the manipulation of the LIBOR is difficult, we prove that it is easy and vulnerable against manipulative attacks.

Keywords: LIBOR, manipulation, developed markets, efficiency, regulation

JEL Classification: G14, G12, G2