What is LIBOR? How Does it Affect me?

In the last two weeks, we have seen the rise of accusations regarding the artificial manipulation of the London InterBank Offered Rate (LIBOR). Barclays Plc, one of the largest financial institutions in the world, was fined in excess of $450 million by the U.S. Commodities Futures Trading Commission (CFTC) as well as the Financial Services Authority in the United Kingdom for allegedly rigging the LIBOR rate. The question must be asked though, what is this rate? And why is it so important?

Let us commence to explore the issue by addressing the question of what this rate is. The LIBOR rate is the reported rate by banking institutions what they estimate their cost would be to borrow money from other banking institutions. Every weekday morning, 18 of the largest institutions in the world report to the British Bankers Association (BBA) what they estimate they would have to pay to borrow U.S. Dollars from other banks. The BBA is a not for profit trade association which represents which represent according to their website “over 200 member banks from 60 countries on the full range of UK and international banking issues”. The LIBOR rate is currently calculated for 10 different currencies, including the U.S. Dollar, the British Pound and the Euro, as well as 15 different loan periods. Each currency has its own panel of banks that report their rate, for instance the panel of the U.S. Dollar is composed of Bank of America, Citibank, JP Morgan Chase, Barclays, and Deutsche Bank to name a few. But what is this rate really? What does it break down to? The New York Times describes it best, they state that ” the LIBOR is a benchmark interest rate that affects how consumers and companies borrow money across the world”. It is in essence the benchmark set by banks to determine how much their cost is, and so by extension how much the cost of borrowing will be for their clients.

This brings us to the next part of the question, why does it matter? Well this is where this rate gets interesting, since it has vast implications on all aspects of our lives. This rate, according to the New York Times, is estimated by regulators to “supports more than $500 trillion worth of transactions”. These range from derivative trading, to simply loans for students and mortgages. If you are a student paying for your education using private loans, the NYT estimates that “About half of variable-rate private student loans are tied to the LIBOR”. Furthermore, “Of the mortgages in the United States that are adjustable-rate, about 45 percent of prime mortgages and 80 percent of subprime have interest rates based on the LIBOR”. It doesn’t just end there, many municipalities around the country had borrowed with interest rates which were based on LIBOR, which means that to an extent, many of these municipalities might of paid rates which were artificially inflated.

In South Florida, the Daily Business Review is reporting that “Potential plaintiffs could have significant claims of financial injury if they put large sums of money into loans or investments with yields based on an artificially depressed LIBOR rate”. If you need representation, contact the one of our attorneys at Sonn & Erez, 1-844-689-5754.

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