Question

1. Is LIBOR replacement has the biggest impact on banks ? 2. Can you discuss the impact of libor replacement from the financial crisis of 2007-2008 and barclays scandal?

Answer 1

1) LIBOR has been most widely used as the unsecure wholesale funding rate in the world. It has been used by financial institution as well as non-financial institution across the world as a reference price to hedge financial instrument. The replacement of LIBOR will have the maximum impact on banks because a significant majority of banks generate their revenues from derivate products and in the absence of a benchmark Interest rate the pricing of financial products becomes difficult and unreliable. 2) Financial crisis of 2007-08 was the outcome of the housing bubble crisis and complex financial products like derivatives. The Barclays scandal relates to the fact that Barclays manipulated the LIBOR rates during these periods so that its own traders can benefit on the derivative products which prices were pegged on the LIBOR base rate. Manipulating the benchmark rate is a serious trust issue because benchmark rate is used as a base rate for calculation of many other rates and in the pricing of financial products. Manipulating benchmark rates for its own gains undermines the credibility of the rate. These scandals have played a key role in negatively effecting the use of LIBOR rates.