As early as 2007, there were concerns raised that the
LIBOR was in fact being manipulated by the banks. However, these were ignored.
It was not until 2010 that the Financial Services Authority began an
investigation into the matter. This investigation ultimately led to the fining
of $453 million against Barclays. The report revealed that the rigging began in
2005. This delay in reacting has led to widespread criticism of the FSA and
other regulatory bodies, however, the FSA has recently denied failing to respond
quickly.
The scandal hit the world stage in June of 2012, when
within one week emails revealing manipulation were made public, Barclays was
forced to pay millions as a result of fixing the rate and a criminal
investigation was launched.
To look at a timeline of events, click here.
Empirical research has also been used to investigate what
trends had become apparent as the fixing evolved. Snider and Youley, 2012,
compare the LIBOR with the EuroDollar market rate, thus comparing the actual
rates used with those quoted. Their results indicate, using skewness as a
measurement of divergence between the markets, that the difference for some
banks was as high as 40 basis points. They also look at the CDS spreads in
contrast with the LIBOR given by banks. Intuitively one would imagine that
these two would have a positive relationship, however, this, they found, is not
always the case. They find that certain banks, Citi in particular, reported a
far too low LIBOR relative to their CDS spreads.
