Journal of Operational Risk

Systemic operational risk: the LIBOR manipulation scandal

Patrick McConnell


The manipulation of the London Interbank Offered Rate (LIBOR) was not a localized event. Unscrupulous traders and managers in some of the largest banks around the world deliberately and systematically manipulated borrowing rates. It was not the work of isolated "rogue traders" but part of business-as-usual in the international money markets. This paper describes the LIBOR scandal and argues that it is an example of systemic operational risk, in particular people risk. The paper first describes the LIBOR setting process. The explosive growth over the past twenty-five years in the use of interest rate swaps (IRSs) and the process of resetting rates on IRSs, which ultimately led to the unethical manipulation of the underlying LIBOR rates, is then described. The paper then looks at official inquiries into manipulation of LIBOR at three banks, Barclays, UBS and Royal Bank of Scotland, to identify examples of operational risk. The transcripts of conversations unearthed by these investigations show rampant illicit activities that were apparently a normal part of doing business, as traders, LIBOR submitters and brokers colluded to manipulate LIBOR for their own interests. Finally, the paper makes some suggestions as to how the management of systemic operational risks may be addressed by banks and regulators.

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