NYSE Euronext picked to oversee LIBOR

(MoneyWatch) One of the biggest cases of financial fraud in recent years was how global banks manipulated the benchmark London Inter-Bank Offer Rate, or LIBOR, to boost profits. Now, a year after the scandal and with banks having been assessed billions of dollar in fines, NYSE Eurotext will take over monitoring LIBOR from the British Bankers' Association.

The hope is that stock exchange giant will restore some credibility to LIBOR, a key interest rate that affects borrowing costs for mortgages, car loans and many other financial products. Yet a major question remains: Can LIBOR, which affects consumers and businesses around the world, ever be trusted without a significant change in how the rate is calculated, and controlled, based on self-reporting by big banks?

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For decades, the BBA, a trade group, provided daily LIBOR figures. Banks would call in the interest rates they charged each other to lend money for different amounts of time. The bankers' association would then calculate average rates.

However, banks in such countries as the U.S., U.K., Germany, Japan, and Switzerland not only submitted information for LIBOR, but traded in financial instruments that depended on LIBOR rates. Individual traders allegedly colluded with employees at other institutions to falsely report numbers, whether higher or lower than the actual ones, in an attempt to manipulate rates to their financial advantage.

LIBOR suffered an enormous loss of prestige as many individuals and institutions realized that they might have been charged higher interest rates as a result. The BBA lost face and, in an attempt to clean up the scandal, an independent committee considered businesses that could take over LIBOR reporting. The companies included NYSE Eurotext and the London Stock Exchange.

However, the problem with LIBOR was not in the final collection but in the voluntary manual reporting. Moving the calculation to NYSE Eurotext, or any other entity, doesn't necessarily change anything. Unless banks are forced to electronically report rates from their systems without manual intervention, manipulation will still be possible.