Libor Scandal Provokes Return to Prime Rate

Libor Scandal Provokes Return to Prime Rate

Author: Eric Everson, MBA, MSIT-SE (Juris Doctorate Candidate, May 2013)

The global banking industry has been rocked by the latest LIBOR scandal.  News of this scandal broke when Barclays Bank was fined with a $454 Million civil settlement reached with various international enforcement agencies.  Estimates currently suggest that the LIBOR scandal could cost banks upwards of $22 Billion (Source: http://www.cnbc.com/id/48169576).  These developments have the international financial industry reconsidering a return to the United States Prime Rate.

The global banking industry has steadily migrated away from the Prime Rate as US interest rates continue to be at year-over-year record lows.  The LIBOR (London InterBank Offer Rate) emerged as a global standard, yet its uncertainty has the global banking industry considering a return to the assurance of the US Prime Rate.

Why is Prime Rate better?  Rather than a composite index comprised by reporting banks, the US Prime Rate is calculated very simply.  Simply stated the Prime Rate is determined by adding 300 basis points or 3.00 percentage points to the Federal funds target rate. As a result if the Federal funds target rate is 0.25%, then the U.S. Prime Rate will be 3.25%.  In comparison the LIBOR is the rate that banks lend to each other and as the latest scandal has unveiled, its certainty is anything by assuring.

In recent years, Prime Rate has been steadily replaced by the LIBOR by global banks operating as MNE’s (Multinational Enterprises).  As a result the banks have enjoyed more flexibility towards profitability, yet it has come at the cost of high risk.  This risk is confirmed by reports of losses surging into the billions.  These losses have many bankers and shareholders alike seeking the reassurance of the US Prime Rate.

#CNBC

@IntleDiscovery

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About the Author:  Eric Everson is a 3L law student at Florida A&M University – College of Law.  Prior to law school he earned an MBA and Masters in Software Engineering while he tenured ten years of executive leadership in the U.S. telecommunications industry.  The views and opinions presented in this blog are his own and are not to be construed as legal advice.  Eric Everson currently serves on the Board of Governors for The Florida Bar Young Lawyers Division Law Student Division and is the President of the Electronic Discovery Law Student Association at Florida A&M University – College of Law.  Follow @IntleDiscovery