Manipulating LIBOR and Other Reference Rates

Manipulating LIBOR and Other Reference Rates: Quantifying Bank Profits from Interest Rate Derivatives Trading

This study seeks to quantify the extent of bank profiteering from reference rate manipulations in interest rate derivatives trading. It shows that the number of profits earned, and the behavior engaged in to earn these profits indicate a level of intent and financial impact beyond that previously demonstrated in the literature. This study uses publicly available data on banks that participated in the LIBOR manipulations during the 2005–2010 period to analyze the impact of such manipulations on banks’ asset positions and profitability. During this period, banks that participated in LIBOR manipulations realized additional profit margins of approximately 2.81 basis points on 17% of their interest rate derivatives trades, which translated into additional annual profits of USD 20.0 billion. Further, this study provides new insights from the evidence that shows that banks likely adjusted their trading patterns to further benefit from their manipulations.

Keywords: LIBOR; LIBOR scandal; reference rates; interest rate derivatives; derivatives; OTC markets

JEL classification: G13; G14; G15; G21; O16

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More About Prof. Ralf Meyer

Department of Management Sciences
Bonn-Rhein-Sieg University of Applied Sciences
Germany

Chairperson:

Prof. John Gatsi
Head, Finance Department
School of Business