It is reported that some major banks are being investigated by regulatory agencies from around the world  for possibly manipulating the London Interbank Offered Rate (LIBOR).

According to the Financial Times it appears that Barclays is at the centre of the investigations with other names in the frame being Bank of America, West LB and Citigroup. This issue has sparked enough interest for the Securities and Exchange Commission, the Justice Department, the Financial Services Authority as well as the Japanese regulators to have a look.

The existence of a LIBOR investigation was first brought to light by UBS in its annual report when it said "UBS understands that the investigations focus on whether there were improper attempts by UBS, either acting on its own or together with others, to manipulate Libor rates at certain times".

LIBOR is a set of rates that are changed on a daily basis at which banks offer to lend to each other over a range of maturities. (Full definition – "The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time." 11 o'clock London Time is when Thomson Reuters has the data for calculation and publication.)

Their are 150 rates of LIBOR produced every day consisting of ten currencies and maturities ranging from overnight out to 12 months. bbalibor says that " … around $350 trillion of swaps and $10 trillion of loans are indexed to bbalibor", so even a small manipulation in rates could net a huge amount of money, hence the regulators' interest.

The sponsor of LIBOR, the British Bankers' Association, claim it is just about impossible for any single bank to fudge the rates. They survey the banks and ask them at what rate they think they can borrow in a 'reasonable' market, they then cut the top and bottom quartile figures out and average the rest (trimmed arithmetic mean). That way they say no single bank can manipulate the rates by submitting out-of-kilter data.

The banks that contribute to the panel data are also selected, the criteria being scale of market activity, credit rating and perceived expertise in the currency concerned. This is reviewed every six months

The data also has to be inputted individually by each contributing bank daily between 11:00 and 11:10 and the data cannot be shared that way until after publication.

The regulators are looking at whether certain banks broke internal 'Chinese Walls', which are designed to prevent information sharing between different arms of banks to prevent one part of the bank profiting from price sensitive inside information. Or if they submitted false data that cloaked their true borrowing costs so putting their banking position in a better light.

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