LIBOR stands for the London Interbank Offered Rate, and it is charged by banks when they borrow from other banks. Various forms of fraud and collusion have come to be referred to as the LIBOR scandal.
How LIBOR Affects the U.S.
Those outside of England might wonder how the LIBOR rates might affect them. The interest rates set by financial institutions, credit card agencies and mortgage lenders are based on the rates set by LIBOR. Those who hold a mortgage, have a loan or own a credit card have been indirectly affected by LIBOR.
The U.S. derivatives market uses LIBOR, often referring to LIBOR as a reference rate. For this reason, the manipulation of submissions that are used to calculate the LIBOR rates can negatively impact consumers and financial markets.
Those who own a mortgage on a home have their interest rates determined partially by LIBOR. Essentially, the amount that they ultimately have to pay on their mortgage is influenced by LIBOR. The interest rates for those with student loans is also determined by LIBOR.
Higher Adjustable-Rates Loans
Those who have adjustable-rate loans can see their monthly loan payments go up, while those who have fixed-rate loans can see their loan payments go down. This has a significant effect on those with student loans, since roughly half of those with student loans have variable-rate loans. Also, mortgage holders saw their mortgage rates explode as a result of LIBOR in 2008.
LIBOR is Subjective
These rates are not based on an objective measurement of how well the member banks are performing, but are instead based on weak data that is completely subjective. Banks have no way of proving that they should have certain rates.
LIBOR Affects Everyone
Even those consumers who do not have loans can be affected by LIBOR. Services that people benefit from, such as schools hospitals, fire departments and public services, have placed their money in adjustable rate mortgages, currencies, mutual funds, pensions and derivatives. As a result of the rigged interest rates, member banks have not been paying out large profits to these investment vehicles. As a result, less money is going to the various public
services that people benefit from.
LIBOR as a Financial Health Indicator
Another way that the LIBOR scandal affects everyone is the way in which LIBOR is used to assess the health of the financial sector. When banks feel confident, they are more likely to report low interest rate numbers. When they do not feel confident, they are more likely to report high interest rate numbers. As a result, policy decisions are made based on erroneous information.
Consequences
Many smaller community banks are considering filing lawsuits against larger banks in response to the scandal. Many of these banks have attempted to remain transparent and provide customers with low interest rates. Given that LIBOR has prevented them from accomplishing these goals, many have considered litigation. The LIBOR scandal has directly impacted the profit margins of these banks.
In addition to the lawsuits, many of the member banks that participated in the LIBOR scandal may be prosecuted for fraud. These efforts might help to deter banks from engaging in acts of fraud in the future. Another way to reduce the negative impact of LIBOR is to have mortgage rates and auto loans connected to the central bank’s target interest rate.
Karl Stockton writes on real estate, finance, investment and current issues. This article was written for complexsearch.com; they can help answer the query: What is a Good Credit Rating?
