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Libor stands for London Inter-bank offered rate. It is an industry-specific term which most of us would never have heard of until the "Libor scandal" became popularized in 2012.
Libor is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. The Libor rate effects over $800,000,000,000,000 in financial deals.
Banks simply cannot lend money to one another whenever they like as there is a system in place.
Every day a group of leading banks submits the interest rates at which they are willing to lend to other finance houses.
They suggest rates in 10 currencies covering 15 different lengths of loan, ranging from overnight to 12 months.
The most important rate is the three-month dollar Libor. The rates submitted are what the banks estimate they would pay other banks to borrow dollars for three months if they borrowed money on the day the rate is being set. Then an average is calculated.
Long-Term Consequences of Libor Scandal
The Libor scandal showed arrogant disregard for the rules and that traders colluded for years to rig Libor, the banks' lending rate. Libor is set by a self-selected, self-policing committee of the world's largest banks.
Starting in 2012, an international investigation into Libor, revealed an overall plot by multiple banks – notably Deutsche Bank, Barclays, UBS, Rabobank, and the Royal Bank of Scotland – to manipulate these interest rates for profit starting as far back as 2003.
Investigations continue to implicate major institutions, exposing them to lawsuits and shaking trust in the global financial system.
Regulators in the United States, the UK, and the European Union have fined banks more than $9 billion for rigging Libor, which underpins over $300 trillion worth of loans worldwide.
Since 2015, authorities in both the UK and the United States have brought criminal charges against individual traders and brokers for their role in manipulating rates.
The scandal has sparked calls for deeper reform of the entire LIBOR rate-setting system, as well as harsher penalties for offending individuals and institutions, but so far change remains piecemeal.