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The Wheatley Review of LIBOR

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The Wheatley Review of LIBOR

Final Report

HM Treasury,

15 min read
10 take-aways
Audio & text

What's inside?

How can regulators safeguard the integrity of the crucial LIBOR interest rate?

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Editorial Rating

8

Qualities

  • Analytical
  • Eye Opening
  • Background

Recommendation

In 2012, faced with fraud allegations surrounding the benchmark interest rate known as the London Interbank Offered Rate (LIBOR), fiscal authorities in the United Kingdom took action. The Chancellor of the Exchequer, George Osborne, asked Martin Wheatley, managing director of the Financial Services Authority and designated head of the new Financial Conduct Authority, to lead a study of how to improve LIBOR. Even though just a small group of bankers sets LIBOR – daily at 11 a.m. Greenwich Mean Time – it is a crucial interest rate that banks and investors use globally in financial contracts worth more than $300 trillion at the time of Wheatley’s report. After relating the results of the study, this clearly stated report recommends 10 reforms and policy changes that would ensure LIBOR’s integrity, though it does not venture into the history of the initial crisis or the area of alleged bank manipulations. getAbstract suggests this official report to bankers, risk managers, monetary authorities and financial regulators.

Summary

The Benchmark

The London Interbank Offered Rate (LIBOR) represents “the average cost to banks of unsecured borrowing for a given currency and time period.” LIBOR consists of several interest rates spanning 10 currencies and 15 “tenors” – that is, borrowing periods ranging from overnight to 12 months. For example, LIBOR provides a rate for overnight borrowings in US dollars, and for one- and six-month US dollar loans. The LIBOR also covers the euro and the currencies of Australia, Canada, Denmark, Great Britain, Japan, New Zealand, Sweden and Switzerland.

LIBOR was born in the 1980s when a group of international banks began (under the aegis of the British Bankers Association, or BBA) to contribute daily answers to this question: “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m.?” Then and now, BBA collects the responses, rejects the highest and lowest rates, and announces the average by noon Greenwich Mean Time. LIBOR acts as a standard lending rate that banks and investors around the world use to price risk in various currencies and timelines.

In 2009, authorities...

About the Author

Martin Wheatley is chief executive of the UK’s Financial Conduct Authority.

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