Financial Crisis Manipulated by London Inter-bank

790 WordsJan 29, 20183 Pages
In 2012, financial markets saw the emergence of the largest financial crisis possibly due to the manipulation of the London Inter-bank Offered Rate by financial institutions mainly banks.. The inter-bank offered rate came into existence when financial institutions in London demanded a benchmark for lending rates. This was needed so as to calculate the prices for various financial instruments such as interest, swaps, futures, options, student loans, and mortgages As a result of this demand, a course of action were taken by the British Banker’s Association which in 1986, resulted in the development and publication of the first London Inter Bank Offered Rate. In addition, the inter-bank offered rate is one of the most active interest rates that is solely based on a self reporting system in which the rate submitter of each bank present on the London inter-bank market a rate at which they were charged to borrow capital. As a result of the lack regulatory structures being put in place, banks were able to submit rates that benefited them at the expense of others. LIBOR not only give preference to the pound sterling but to that of other worldwide currencies such as US Dollar, Japanese Yen and Canadian Dollar. Nearly every rate used in financial calculations has its basis in the Capital Allocation Pricing Model which states that any interest rate required for any risky venture will necessitate a compensation rate above a “risk-free rate.” By way of explanation, the riskier an
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