The Manipulation Potential of Libor and Euribor - Report Writing - Accounting and Finance Assignment Help

Assignment Task:

Abstract

The London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor) are two key benchmark interest rates used in a plethora of financial contracts. The integrity of the rate-setting processes has been under intense scrutiny since 2007. We analyze Libor and Euribor submissions by the individual banks and shed light on the underlying manipulation potential for the actual and several alternative rate-setting procedures. We find that such alternative fixings could significantly reduce the effect of manipulation. We also explore related issues such as the sample size and the particular questions asked of the banks in the rate-setting process.

Introduction

One of the most important developments during the depths of the global financial crisis following the collapse of Lehman Brothers on September 15, 2008 was the discussion of the possible manipulation of the London Interbank Offered Rate (Libor) and its financial cousin, the Euro Interbank Offered Rate (Euribor), two key market benchmark interest rates. Although there had been prior conjectures of this possibility, new reports received heightened attention against the backdrop of jittery financial markets following the Lehman bankruptcy. Since spot and derivatives contracts with notional amounts running into the hundreds of trillions of dollars are linked to Libor and related benchmarks, any serious questions about the integrity of these rates could potentially cause massive chaos in global markets (see, e.g., the discussion in Wheatley (2012b)).

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