The Libor Scandal Assignment Example | Topics and Well Written Essays - 1500 words

The Libor Scandal - Assignment Example Its use affects the pricing of loans, mortgages and other financial products thus directly affecting the people’s lives. This paper will therefore attempt to examine the process and the purpose as well, of how commercial banks set and determine the LIBOR rates. It will further explore the role of LIBOR in the commercial sector, and finally consider the impact of this rate on businesses and consumers. It is paramount to understand the meaning of the word LIBOR. In definition, LIBOR refers to the London Interbank Offered Rate. It is also referred to as ICE LIBOR. It can also be understood as a rate used by contributor banks in the event that one bank wants to borrow funds or inter-bank deposits, from another fellow member bank. Contributor banks refer to banks, which are involved in the setting and fixing of LIBORS. They include the Deutsche bank, Bank of America, Royal Bank of Canada, and the Royal Bank of Scotland. The LIBOR is thus a benchmark rate that some commercial banks in the world use to determine the rate at which they will lend short-term deposits to each other. It can be equated to the federal funds rate (Gumbo, 2011:23). The LIBOR, whose administration is under the ICE Benchmark Administration, is usually based on the five major currencies of the world. These are the United States dollar, the Euro, the sterling pound, the Japanese Yen, and the Swiss Franc. In order to understand well the process and why banks set their LIBOR rates, it is crucial that we briefly look at the circumstances that led to the formation of this rate. The history of LIBOR is traced back to the year 1984 although its first application in the financial and money markets was not until the year 1986 (Twomey, 2011:52). In the 1984, there was an increased growth in business using financial market instruments. More and more banks were increasingly using