Libor rate and bank self-regulation

Abstract

The Libor rate is perhaps the most important benchmark worldwide. In recent days the rate has been in the public eye because of the allegations against Barclays and otherfinancial conglomerates. The discussion has focused on the search for the culprits. It is argued that banks colluded to obtain higher profits or that the Bank of England failed to regulate. However, the real cause of this scandal is in the way Libor is determined. The way the rate is established leads to a wide discretion on the part of banks which candetermine it virtually at will. As a result they have a great power over financial markets. In order to resolve the problem, once and for all, and prevent such situations fromreappearing it is crucial to make a major change in the international financial system.