The ongoing scandal over Libor fixation involving Barclays and some other major western banks is, above all, a breach of trust committed by them on their huge clientele spread across the globe. The Libor — or the London interbank offered rate — is the world’s most widely used interest benchmark for many other rates, ranging from commercial loans to mortgages. Many derivative contracts are indexed to the Libor. Estimates of how much is tied to Libor vary from $350 trillion to $800 trillion, immense by any yardstick even at the lower end. The process of arriving at the benchmark rate was, until recently, considered fairly transparent and relatively immune from manipulation. Leading banks are called upon every weekday to quote rates on what they would pay for loans from another bank for different maturities and currencies. The rates so obtained are averaged out after dropping the outliers. There are as many as 150 Libor rates in dollars and other major currencies, varying in tenure from overnight to one year. The British Bankers’ Association oversees the whole procedure. As the financial sector ballooned in the last decade, the Libor gained in importance. What gave the rate immense credibility was the fact that the banks that participate in the Libor setting process are among the biggest names in the business. Nobody could imagine these same banks would manipulate the process by fudging their quotes to suit their own positions. Yet that is precisely what some of them have been doing.

If the Libor was rigged artificially high, customers who took a loan lost out. If, on the other hand, the rate was fixed artificially low, the borrower gained. Naturally, those who have been ripped off have gone to court. Regulators who were lax earlier have moved in with vigour. Barclays Bank, at the centre of the scandal, has been fined a record $450 million by British and American regulators. Investigations, both civil and criminal, are going on as regulators around the world try to find out whether big banks gamed the rates for their own benefit before and after the financial crisis. The only defence offered by banks so far, admittedly a feeble one, is that in the absence of an active interbank market in the post crisis period, they could base their quotes only on estimates rather than real market data. If that were so, however, the search for a more acceptable interest rate benchmark should have begun much earlier. Banks and regulators in the West, with their reputation already tarnished by one scandal or another, will have to strive hard to earn back the trust of the rest of the world.

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