LIBOR scandal: What is it and why you should care

The latest banking fraud is centered in Britain, where the financial firm Barclays will pay half a billion dollars in fines for efforts to manipulate a benchmark interest rate. Other banks must have been involved, though, and the full range of the scandal has yet to emerge. Here's a quick look at what is known and why it matters.

What is LIBOR?

LIBOR stands for London Interbank Offered Rate. It's supposed to measure the average interest rate that banks charge when they lend to each other. LIBOR is also used as a foundation for other rates (such as the reset of adjustable rate mortgages) and a reference point for complex financial derivatives.

By one measure, some $300 trillion in loans or derivative contracts are pegged to LIBOR. That's 20 times the size of one year's economic output in the United States.

The LIBOR rates are determined by major banks. The banks report interest-rate estimates to the British Bankers Association, and the firm Thomson Reuters averages them to provide daily LIBOR numbers. The catch: The banks provide the numbers on an honor system. That's different from gathering data on observable transactions.

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Banks are the enemy.