Spot the LIBOR Scandal


Source: Bloomberg

The above graph is courtesy of Bloomberg. The top half shows the spread between the UK 3 month LIBOR (Orange) and the OIS 3 month rate (white). The difference between the two rates is that LIBOR is artificially created by bankers, whereas the OIS rate is established by the market. The second half of the graph displays the spread between the two rates. Historically speaking the two rates track each other almost identically, as they should if bankers are submitting honest quotes. However, during the credit crunch the spread between these two rates widened to historical highs as LIBOR quickly decreased (meaning borrowing was cheaper) whereas the OIS rate only dropped to that level after the credit crunch was over. No graph shows the LIBOR scandal and its manipulation better than this one in my opinion.

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4 thoughts on “Spot the LIBOR Scandal

  1. What is OIS?

    The bottom half has a y-axis on a different scale?

    LIBOR is run by who? A co-operative arrangement among banks? SO it is a form of industry self-regulation?

    Is this accurate as a summary for more lay people? By submitting false information (about…what? Their balance sheet or reserves) banks could receive inter-bank credit or loans at a rate that was artificially lower than a market rate. hence, banks could buy low and sell a little higher (but at big volumes?)? Accurate?

    • Jordi, you are a bit off in your description. LIBOR is established by traders estimating what it would cost their bank to borrow a certain currency over a certain time period. These estimates are not based upon real trades however. A lot of your questions from above I will be addressing in my white paper so look forward to that.

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