By soliciting responses from only a few banks, many of which simply estimated or marked up or down their actual borrowing costs, LIBOR was found to vary wildly from the real cost of borrowing.
This led to an international investigation that is on-going. Proposals to alter the calculation of LIBOR may greatly reduce the reported cost of borrowing for American and UK banks, which would mean that the banking system may not have grounds for higher interest charged on consumer financial products.
The LIBOR scandal was one of the worst cover-ups discovered in the banking system. Because so much of the financial world is based on LIBOR – mortgages, some credit cards, and trillions of dollars in derivatives – banks have an incentive to move the published rate so that it works in their favor. This meant banks reported higher and lower interest costs to the British Banker Association that would then report the LIBOR rate for all large financial contracts.
It now appears that a new system for determining the true LIBOR number will throw out bad information while keeping the most accurate information, possibly saving consumers money on financial products based on the reported LIBOR rate. A new sponsor will likely take over the post from the BBA, and will more carefully extract and report data based on the banking system’s true borrowing costs.
Source:
creditcardflyers.com
