June 19, 2013 : International Finance Magazine gives you the story on LIBOR manipulation and the impact of the Financial Services Act 2012 which has given more powers to exert pressure on banks which do not have adequate risk management and controls; the article also explains how LIBOR is calculated and its importance worldwide.

The U.K. market regulator has increased the fines for risk management failings by more than seven times, according to a report by the Chartered Institute of Internal Auditors.  The Financial Conduct Authority has levied a fine of 292 million pounds ($ 458 million) in fines against firms that did not have adequate risk management and controls in 2012. In 2011 the regulator had levied a fine of 38 million pounds.

Ian Peters, CEO of CIIA, said “The financial crisis and LIBOR scandals, interest rate swaps mis-selling have underlined how easily weak internal controls can lead to inappropriate conduct and, at the extreme, even let potentially criminal practices go unnoticed”. FSA had fined Barclays Plc, UK’s second biggest bank, about 60 million pounds for attempting to manipulate LIBOR.

LIBOR

The term LIBOR has been extensively used in the past few weeks in the U.K. and Singapore. The LIBOR manipulation has already cost the CEO of Barclays Bank of his job. Singapore’s Central Bank had also rapped up 20 banks and censored them for insufficient risk management and internal controls which allowed traders to alter the rates. James. J. Angel, Associate Professor of Finance, Georgetown University, provides expert insights on LIBOR and the increasing crackdown on manipulation of LIBOR norms.

LIBOR stands for London Interbank Offered Rate. It is the rate at which banks are able to borrow money from each other. An agency called by the name British Bankers Association surveys a group of banks everyday and asks them, if you were to borrow money at 11 A.M, London time what would you pay for it. After taking the submissions the BBA averages the inter-bank interest rates being offered by its membership. LIBOR is calculated and published by Thomson Reuters on behalf of the British Bankers Association (BBA). LIBOR rates vary for different currencies and different maturities. For example a bank would have a daily rate for how much it would cost to get a 30 day dollar loan, 60 day UK pound loan and a 90 day Japanese Yen Loan. It is the standard rate for computing an interest rate in all the major currencies and in different maturities. It is set in about 10 currencies and for each one there is one, three, six and twelve month maturity with many in between. The official LIBOR rates are announced everyday at 11:45 A.M. London time by Thomson Reuters on behalf of the British Bankers Association. It is viewed as the most important benchmark in the world for short term interest rates. In the financial markets LIBOR rates are used as the base rate for a large number of financial products such as futures, options and swaps. Banks also use the rates as base rates for setting the interest rates on loans, savings and mortgages. Since, LIBOR rates are treated as the base rate for other products including stocks, this is the reason why it is monitored with great interest and by a large number of individuals worldwide.

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