The 2012 Libor Scandal: An Analysis of the Lack of Institutional Oversight and Incentives to Deter Manipulation of the World's Most 'Important Number'

Abstract

The purpose of this Note is to explore how the Libor Scandal of 2012 unraveled, focusing primarily on institutional oversight of Libor by the private trade groups and the unwillingness of government involvement to maintain the integrity of this financial instrument. First, this Note will explain what Libor is and its importance to the international finance system. Notably, this section will explore Libor’s governance, its use in various financial products, and how Libor is calculated on a daily basis. After giving an overview of Libor, the Note then addresses how the Libor Scandal of 2012 developed, looking specifically at the Bank of England and its unwillingness to play a larger regulatory role in Libor. Despite various studies addressing concerns with the integrity of Libor, heightened regulation was not addressed, leading to bankers manipulating rates. Next, this Note examines antitrust and securities law surrounding Libor. It becomes apparent from laws applied during the financial crisis of 2008 that banks were given an incentive to manipulate numbers to improve their viability within the marketplace. This analysis suggests that victims affected by the banks will not likely find legal recourse. Finally, this Note concludes by looking at proposed reforms made in light of this scandal and offers several policy proposals to avoid another Libor Scandal. Specifically, methods or regulating Libor and proportionality of punishment are considered for providing proper incentives to deter fraudulent behavior.