Bloomberg View: Libor Has Outworn Its Welcome; Fixing the Cybersecurity Act

Every weekday morning at about 11:00 a.m., a panel of the world’s largest banks reports how much it would cost to borrow from other banks in various currencies and time periods. An adjusted average of those rates determines the size of payments on corporate and mortgage loans worldwide. This is the London interbank offered rate, or Libor. About $360 trillion in financial contracts depends on Libor, and in times of crisis it serves as an indicator of stress in the banking system: The more banks pay for short-term loans, the more trouble they’re in.

Problem is, banks have powerful incentives to fib about their borrowing costs—a flaw that’s become the focus of civil lawsuits, a criminal investigation by the U.S. Department of Justice, and a multinational regulatory inquiry into possible manipulation of Libor. Sick banks can make themselves appear healthier by artificially lowering their reported borrowing rates, which are made public. Manipulating Libor can also help banks that are major players in derivatives. Hundreds of millions of dollars can be made on differences of as little as a quarter of a percentage point, and studies suggest such incentives are skewing Libor. Economists at the Federal Reserve Bank of New York estimated that, during the financial crisis, the rates reported by banks in the Libor panel were as much as 0.3 percentage points lower than their borrowing rates.