World Politics News   Articles for World Politics Course

There have been some rather astonishing developments in the financial world surrounding how a critical interest rate has been determined in the recent past.  There is a rather arcane interest rate–the London Interbank Offered Rate (LIBOR)–that determines how much interest major banks charge each other for short term loans.  In the past, the LIBOR was determined on a daily basis by a panel in London who received information on how much interest individual banks were charging each other.  The panel would take all this information and determine an average of the rates and publish the LIBOR.  Then other financial institutions would set their interest rates on the basis of the LIBOR (depending on risk–the higher the risk, the higher the rate).

Obviously the system relied on the independence of the rates given to the LIBOR panel.  We simply assumed that banks would not collude and doctor their rates so that the final LIBOR rate would be to their advantage.  Unfortunately, that assumption overestimated the integrity of the banks.  We are now learning that Barclay’s Bank, a 332-year old venerable institution, was actively involved in manipulating the information they sent to the panel.  Since it is impossible for a single institution to collude, it is clear that other banks are involved, and the email trail is