# What Was the LIBOR Scandal? What Happened and Impacted Companies

![LIBOR Scandal: A scheme by bankers to manipulate the London Interbank Offered Rate for profit.](https://www.investopedia.com/thmb/M7sFLCTanKu60N5Ub7JPVIGwkKI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/libor-scandal.asp-final-68f25cf57c7e435596c912e2a4a686df.png)

*— Investopedia / Tara Anand*

## What Was the LIBOR Scandal?

The LIBOR scandal was a highly-publicized scheme in which bankers at several major financial institutions colluded with each other to manipulate the [London Interbank Offered Rate](https://www.investopedia.com/terms/l/libor.asp) (LIBOR). The scandal sowed distrust in the financial industry and led to a wave of fines, lawsuits, and regulatory actions. Although the scandal came to light in 2012, there is evidence suggesting that the collusion in question had been ongoing since as early as 2003.

Many leading financial institutions were implicated in the scandal, including Deutsche Bank ([DB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=db)), Barclays ([BCS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=bcs)), Citigroup ([C](https://www.investopedia.com/markets/quote?tvwidgetsymbol=c)), JPMorgan Chase ([JPM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=JPM)), and the Royal Bank of Scotland ([RBS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=rbs)).

As a result of the rate-fixing scandal, questions around [LIBOR's validity as a credible benchmark rate](https://www.investopedia.com/terms/l/libor-curve.asp) were raised. It was fully phased out on June 30, 2023. It was replaced by the [Secured Overnight Financing Rate](https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954) (SOFR). 

### Key Takeaways

*   The LIBOR scandal refers to a major episode of financial collusion in which one of the world’s most influential benchmark interest rates was manipulated by various banks.
*   The scheme caused financial contracts to be mis-priced throughout the world, in transactions such as mortgages, corporate fundraising, and derivative trades.
*   The scandal left several regulatory changes, lawsuits, and fines in its wake, damaging public trust in the financial markets.

## Understanding the LIBOR Scandal

The LIBOR was a [benchmark interest rate](https://www.investopedia.com/terms/b/benchmark.asp) that was used for the pricing of loans and [derivative products](https://www.investopedia.com/terms/d/derivative.asp) throughout the world. It was formed using reference interest rates submitted by participating banks. During the LIBOR Scandal, traders at many of these banks deliberately submitted artificially low or high interest rates in order to force the LIBOR higher or lower, in an effort to support their own institutions’ derivative and trading activities.  

> **Important**
>
> The LIBOR scandal was significant because of the central role LIBOR played in global finance.

The LIBOR was used to determine everything from the interest rates that giant corporations will pay for loans, to the rates individual consumers will pay for [home mortgages](https://www.investopedia.com/terms/m/mortgage.asp) or [student loans](https://www.investopedia.com/student-loans-4689727). It was also used in derivative pricing. Therefore, by manipulating the LIBOR, the traders in question were indirectly causing a cascade of mispriced financial assets throughout the entire global financial system. Understandably, this led to a substantial public backlash, as parties throughout the world wondered whether they may have been harmed financially.

Public outrage at the scandal was further exacerbated by the apparent brashness of many of the actors involved. This became evident as emails and phone records were released during investigations. Evidence showed traders openly asking others to set rates at a specific amount so that a particular position would be profitable.

[Regulators](https://www.investopedia.com/articles/economics/09/financial-regulatory-body.asp) in both the United States and the United Kingdom levied some $9 billion in fines on banks involved in the scandal, as well as a slew of criminal charges. Because LIBOR was used in the pricing of many of the financial instruments [used by corporations and governments](https://www.investopedia.com/articles/investing/112014/who-uses-libor-data-and-why.asp), they also filed lawsuits, alleging that the rate-fixing negatively affected them.

Following the exposure of the LIBOR collusion, Britain’s [Financial Conduct Authority](https://www.investopedia.com/terms/f/financial-conduct-authority-uk-fca.asp) (FCA) took the responsibility for LIBOR supervision away from the [British Bankers Association](https://www.investopedia.com/terms/b/britishba.asp) (BBA) and turned it over to the Intercontinental Exchange's Benchmark Administration (IBA). The IBA is an independent U.K. subsidiary of the private U.S.-based exchange operator, [Intercontinental Exchange](https://www.investopedia.com/terms/i/intercontinentalexchange.asp) (ICE).

## Who Was Affected by the LIBOR Scandal?

Although it is difficult to know whether any particular person was affected by the LIBOR scandal, there are many potential ways in which its impact could have been felt. For example, individual homeowners may have initiated [fixed-rate mortgages](https://www.investopedia.com/mortgage/mortgage-rates/fixed-versus-adjustable-rate/) at a time when mortgage rates were artificially raised based on upward manipulation of the LIBOR. From the homeowner’s perspective, every dollar of additional expense caused by the artificially high rates could be seen as a kind of theft being committed by the LIBOR rate fixers. Similarly, many traders who were party to derivative contracts would have experienced unnecessarily severe losses as a result of the LIBOR scandal.

## What Were the Fines Issued in the LIBOR Scandal?

Regulators issued about $9 billion in fines against the banks involved in the scandal.

## Were Criminal Charges Made in the LIBOR Scandal?

Yes. In May 2015, JP Morgan Chase, Citigroup, Barclays, UBS, and Royal Bank of Scotland pleaded guilty to criminal charges. Several individuals were also charged. In November 2015, a judge sentenced two former Rabobank employees to one to two years in prison.

## The Bottom Line

Ultimately, the LIBOR scandal left many changes in its wake. The New York Federal Reserve launched a LIBOR replacement in April 2018 called the [Secured Overnight Financing Rate](https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954) (SOFR), which is based on short-term loans observed in the repo market. (Unlike the LIBOR, there’s extensive trading in Treasury [repos](https://www.investopedia.com/terms/r/repurchaseagreement.asp), theoretically making it a more accurate indicator of borrowing costs. Moreover, the SOFR is based on data from observable transactions rather than on estimated borrowing rates, as was sometimes the case with LIBOR.) In December 2022, the Federal Reserve Board adopted a final rule that used benchmarks based on SOFR. On June 30, 2023, LIBOR was fully phased out.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[What You Need to Know About the End of LIBOR – Investor Bulletin](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/what-you-need-know-about-end-libor-investor-bulletin)."
>     
> 2.  The Intercontinental Exchange. "[LIBOR](https://www.theice.com/iba/libor)."
>     
> 3.  Council on Foreign Relations. "[Understanding the Libor Scandal](https://www.cfr.org/backgrounder/understanding-libor-scandal)."