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LIBOR 1986–2021:
The Making and Unmaking of ‘the World’s Most
Important Price’
Alexis Stenfors
1
and Duncan Lindo
2
Abstract
Up until around 2008 and the subsequent revelation of systematic
manipulation, the integrity and ‘facticity’ of the London Interbank Offered
Rate (LIBOR) were rarely questioned. Academics treated LIBOR and the
Eurodollar market as if they were synonyms. Central bankers conducted
monetary policy as if the LIBOR was an objective reflection of the money
market rate. Corporates and households entered into LIBOR-indexed
financial contacts as if a money market was the underlying benchmark. This
paper investigates how and why LIBOR managed to maintain its status as a
term for the competitive money market colloquially, professionally and in
the economic literature for so long. By adopting a theoretical framework
drawing insights from both political economy and sociology, and applying
it to the LIBOR-indexed derivatives market, it is shown how the
benchmark’s appearance betrays its fundamental nature. This process
benefits certain actors within the market: the banks. Importantly, however,
it also reveals how LIBOR became, and remained, such an important
benchmark, how it came to be perceived as an ‘objective fact’, and why the
regulation that came into place was insufficient to sustain its future use.
Keywords: LIBOR; benchmark; price; derivatives; Eurodollar market;
banks; financial regulation.
1
Department of Economics and Finance, University of Portsmouth, Richmond Building, Portland Street,
Portsmouth PO1 3DE, UK. E-mail: alexis.stenfors@port.ac.uk
2
Leeds University Business School, Maurice Keyworth Building, University of Leeds, Leeds LS2 9JT, UK. E-
mail: D.A.Lindo@leeds.ac.uk.
This paper has benefitted greatly from discussions with Professor Costas Lapavitsas (SOAS, University of
London), Professor Yuval Millo (University of Leicester) and Professor Yanis Varoufakis (University of Texas,
Austin), as well as participants at the Cass Business School for the ‘Constructing Financial Risk: Key
Perspectives and Debates’ workshop, Cass Business School on 13 April 2015.
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Introduction
On 27 July 2017, Andrew Bailey, Chief Executive of the UK Financial Conduct Authority
surprisingly announced that the London Interbank Offered Rate (LIBOR) would cease to
exist in 2021.
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Having become a regulated financial benchmark in the aftermath of the
‘LIBOR-scandal’ that erupted in 2012, the supervisor had come to the conclusion that ‘the
underlying market that LIBOR seeks to measure – the market for unsecured term lending to
banks – is no longer sufficiently active’ (FCA 2017). In essence, the regulator found that it
was unsustainable to support the process of generating a price that simply was ‘made up’.
The making of LIBOR, sometimes coined ‘the world’s most important number’,
provides a remarkable history lesson in contemporary finance (Finch and Vaughan 2017;
Stenfors 2017). However, the gradual, and now final, ‘unmaking’ of it also provides crucial
insights into how benchmarks could be conceptualised in economic and social theory. Indeed,
prior to the LIBOR scandal, benchmarks in financial markets were seldom mentioned as
more than footnotes in academic literature, or for that matter by the financial press or
regulators – despite their prevalence and importance. In many ways, this is not surprising.
After all, benchmarks are used as standardised indicators for measuring and analysing
performance and predictions for the future of something else. Just as the consumer price
index (CPI) is a measure of inflation in economics, the FTSE100 and S&P500 are useful
benchmarks for studying the U.K. and U.S. stock markets in finance. ‘Inflation’ and ‘the U.S.
stock market’ are common knowledge. Extremely few, however, know the precise
composition or methodology underpinning the CPI or the S&P500.
The discovery that LIBOR, at times, had been subject to manipulation by banks
immediately put the integrity of the arguably most important benchmark in economics and
finance into question. LIBOR-indexed derivatives portfolios, and the desire to signal a
relatively low funding cost to the rest of the market, appear to have given some banks
sufficiently strong incentives to submit deceptive LIBOR quotes in order to reap monetary
benefits from having the exclusive privilege to participate in the LIBOR fixing process (see,
for instance, Financial Services Agency 2011; FSA 2012). Understandably, therefore, the
benchmark literature has since almost become synonymous with market misconduct,
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LIBOR’s replacement has, at the time of writing, not yet been agreed upon. Currently, observers appear to be
in favour of overnight index swaps (OIS), echoing the analysis by Bryan and Rafferty (2016).
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manipulation and regulation (e.g. Abrantes-Metz et al. 2012; Stenfors 2014ab; Ashton and
Christophers 2015; Duffie and Stein 2015).
However, by being deeply rooted in the financial system as a whole, the relevance of
LIBOR
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or its equivalent elsewhere (such as EURIBOR, TIBOR and so on) as an important
‘price’ outside the realm of the trading floors can hardly be understated. Benchmarks
referencing interest rates affect not only central banks, banks and other financial institutions,
but also corporates, investors and households. According to the Bank for International
Settlements, the notional amount of outstanding over-the-counter (OTC) interest rate
derivatives contracts amounted to 544 trillion U.S. dollars in June 2016 (BIS 2016a). Of
these, it estimated that that between 60% and 90% are linked to the LIBOR, EURIBOR or
TIBOR. For the vast exchange-traded futures and options market, the corresponding
percentages lie between 90% and 100%, depending on the currency (FEMR 2014). However,
LIBOR is not only used in derivatives, but also in mortgages, bonds, corporate and student
loan contacts - as well as in valuation methods relating to accounting, tax, risk and monetary
policy.
Acknowledging the importance of LIBOR (and the structure and events enabling the
scandal to unfold), the subsequent benchmark reforms were thus underpinned by principles
such as ‘professionalism’, ‘correctness’ and ‘formalisation’. Overall, the measures strived to
eliminate, or at least greatly reduce, the incentives of benchmark manipulation. The reforms
were neither intended to make the underlying market more transparent, nor to make LIBOR
based upon market transactions. Instead, provisions such as the use of ‘expert judgment’ were
supposed to address periods when the underlying market was not sufficiently active.
Ultimately, and paradoxically before the new European benchmark legislation was to
fully apply from 1 January 2018 (ESMA 2017), LIBOR was found to be unsustainable as a
benchmark due to a lack of activity in the underlying market. It would be tempting to
attribute this realisation either to the greater scrutiny imposed upon banks, and dialogues with
regulators, following the scandal or to the general demise of unsecured money markets
following the credit crunch a decade ago.
However, such an approach would fail to address several important theoretical
questions relating to why the integrity and ‘facticity’ of LIBOR remain intact from its
inception in 1986 up until the financial crisis of 2007-08. As Stenfors (2014a, 392) points out,
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Other LIBOR-equivalent benchmarks, such as the Euro Interbank Offered Rate (EURIBOR) and the Tokyo
Interbank Offered Rate (TIBOR), have also come under regulatory scrutiny. In this paper, we generally refer to
LIBOR as encompassing all ‘LIBOR-equivalent’ benchmarks.
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‘academics treated the terms [LIBOR and money market] as if they were synonyms.
Policymakers acted as if the LIBOR was an objective reflection of the money market rate.
Corporates and households entered into LIBOR-indexed financial contacts as if the money
market was the underlying benchmark’. Consequently, and regardless of what the future
holds, questions remain how and why LIBOR achieved, and maintained for so long, its status
as a term for the competitive Eurodollar market colloquially, professionally and in the
economic literature. Or, if seen through the lens of the LIBOR scandal: how and why was
deception seen as unthinkable for more than two decades, only to change so quickly once the
scandal broke? Or, when looking towards 2021 and beyond: how and why were the
regulatory reforms destined to fail?
We argue that to understand the making, and unmaking, of LIBOR, it is critical to
understand the ways in which its appearance creates misconceptions about its fundamental or
essential nature. To do this, we trace the changing historical and social conditions, which
gave rise to its emergence and development. We make use of the following approach to
reveal the underlying logic of these developments. Marx (1852) wrote: ‘Men make their own
history, but they do not make it as they please; they do not make it under self-selected
circumstances, but under circumstances existing already, given and transmitted from the
past’. A study of the emergence and development of LIBOR clearly shows this pattern of
agency within an inherited structure, which, in turn, alters the structure, leading to fresh
incentives for agents. The structure within which agents act is, of course, a social construct,
established through the widespread adoption of certain practices which once entrenched take
on an objective appearance (and which Ilyenkov (2012) labelled an ‘ideal’). This apparently
objective structure, such as the existence of the Eurodollar market, or LIBOR, interacts with
the motivations of agents, here above all economic or profit motivations, to establish new
practices, and hence structures for further practices.
Given a complex and multi-causal world, it would be impossible to predict how such
behaviour could develop in the future. It would, for instance, have been impossible during the
1960s to extrapolate from the development of the Eurodollar market to the almost
incomprehensibly large amount of outstanding LIBOR-indexed derivatives half a century
later. Nevertheless, with the benefit of hindsight, we can develop a logical path from the
emergence of the Eurodollar market to the LIBOR scandal and beyond by showing how new
practices developed in these financial markets, which shaped future behaviour.
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In doing so, we must take into account the power relations involved. Established
practices, ideals, and social structures incorporate the power involved in the relations which
underpin them (albeit that they do so via mediations which may sometimes produce
unexpected outcomes). In the case of LIBOR, it is above all the largest banks that could and
did act to make (and unmake) LIBOR. They did so primarily by trying to exploit profit-
making opportunities that were thrown up along the way, from syndicated loans, to
Eurodollar futures, to OTC swaps. Their pursuit of profit opportunities at each turn changed
the shape of financial markets, throwing up new opportunities for the banks themselves, and
below we move through analysis from one stage to another tracing this evolution. They do so
above all with the transactions they undertake and their power to do so – by creating
favourable conventions, by seeking to avoid regulation and transparency, by lobbying for
status quo and by shaping perceptions held by others.
The LIBOR scandal has undoubtedly shaken the social structure of the LIBOR panel
banks to its core. However, the widespread misconduct and the subsequent vast number of
transcripts of evidence released by the regulators do not, in themselves, reveal the evolution
of the “consensus of views held by the body of these individuals as to what is right, good,
expedient […]” (Veblen 1899, 90). In this study, we see that both markets and benchmarks
emerge, shape agents’ actions and are in turn dramatically altered by new practices that
develop. For example, we see the Eurodollar markets emerge, give rise to LIBOR and
become eclipsed by it. However, in order to understand what we mean by categories such as
‘markets’ we need to understand who participates in them, and who took what actions (and
with which motivations) to establish them. In the case of LIBOR, we can trace the
motivations for banks to establish the Eurodollar market, why interest rate benchmarks
emerged and why banks went on to develop those benchmarks at the centre of the derivatives
markets which developed so rapidly from the late 1980s onwards.
This approach provides new insights into the rise, importance and seeming solidity of
LIBOR. The method draws on Marxist political economy, particularly the idea of relations
solidifying as objects, and of established practices becoming ‘ideals’ (Ilyenkov 2012).
However, as Lindo (2017) points out, those examining derivatives with a broadly Marxist
frame have generally examined their role in the broader developments of capitalism (e.g.
LiPuma and Lee 2005; Bryan and Rafferty 2006; Wigan 2008, 2009) as have other heterodox
economists, notably Toporowski. (2000). What is required in this paper, setting it apart from
these studies, is a political economy of financial mechanisms, a look inside financial markets
