Journal of Banking & Finance 36 (2012) 136–150

Contents lists available at ScienceDirect

Journal of Banking & Finance

journal homepage: www.elsevier.com/locate/jbf

Libor manipulation?
Rosa M. Abrantes-Metz a,⇑, Michael Kraten b, Albert D. Metz c, Gim S. Seow d
a
AFE Consulting, Leonard N. Stern School of Business, New York University, New York, NY 10020, USA
b
School of Business, Providence College, Providence, RI 02918, USA
c
Moody’s Investors Service, New York, NY 10007, USA
d
School of Business, University of Connecticut, Storrs, CT 06269, USA

a r t i c l e i n f o a b s t r a c t

Article history: On May 29, 2008 the Wall Street Journal published an article alleging that several global banks were
Received 20 March 2009 reporting Libor quotes significantly lower than those implied by prevailing credit default swap (CDS)
Accepted 20 June 2011 spreads. While acknowledging that the ‘‘analysis doesn’t prove that banks are lying or manipulating
Available online 13 July 2011
Libor,’’ it nevertheless conjectures that these banks may ‘‘have been low-balling their borrowing rates
to avoid looking desperate for cash.’’
JEL classification: In this paper we compare Libor with other short-term borrowing rates, analyze individual bank quotes,
C10
and compare these individual quotes to CDS spreads and market capitalization data during three periods:
C22
G14
1/1/07–8/8/07 (Period 1), 8/9/07–4/16/08 (Period 2), and 4/17/08–5/30/08 (Period 3). We find some
G24 anomalous individual quotes, but the evidence is inconsistent with a material manipulation of the US dol-
K20 lar 1-month Libor rate.
Ó 2011 Elsevier B.V. All rights reserved.
Keywords:
Libor
Manipulations
Conspiracies
Collusion
Price-fixing
Bid-rigging
Credit default swap spreads

1. Introduction
A May 29, 2008 Wall Street Journal article alleges that several
global banks were reporting unjustifiably low borrowing costs for
the calculation of the daily London Interbank Offer Rate (Libor)
benchmark (Mollenkamp and Whitehouse, 2008). Specifically, the
writers allege that the banks were reporting costs significantly be-
low the rates justified by bank-specific cost trend movements in
the default insurance market. Although the Wall Street Journal
article acknowledges that its ‘‘analysis doesn’t prove that banks
are lying or manipulating Libor,’’ it conjectures that these banks
may ‘‘have been low-balling their borrowing rates to avoid looking
desperate for cash.’’
The British Bankers’ Association’s (BBA) website claims that
‘‘BBA Libor is the primary benchmark for short-term interest rates
⇑ Corresponding author. Tel.: +1 212 899 5311.
E-mail addresses: RAbrantes-Metz@afeconsult.com (R.M. Abrantes-Metz),
mkraten@suffolk.edu (M. Kraten), Albert.Metz@moodys.com (A.D. Metz), gseow@
business.uconn.edu (G.S. Seow).
globally. It is used as the basis for settlement of interest rate con-
tracts on many of the world’s major futures and options exchanges
(including LIFFE, Deutsche Term Börse, Euronext, SIMEX and TIFFE)
as well as most Over-the-Counter (OTC) and lending transactions.’’
For transactions that utilize Libor as a benchmark for establishing
borrowing costs, a slight understatement of the rate may generate
sizable wealth transfers from lenders to borrowers.
Following the publication of the Wall Street Journal article,
other major financial publications voiced similar concerns. For
instance, a June 2, 2008 article in The Financial Times agrees
that ‘‘. . . the rate of borrowing in Libor has lagged behind other
market-based measures of unsecured funding used by the vast
majority of financial institutions. This has aroused suspicions
that the small group of banks which supply the BBA with Libor
quotes have understated true borrowing rates so as not to fan
fears (that) they have funding problems’’ (Mackenzie and Tett,
2008).
The motivation of this study is to extend the Wall Street
Journal’s analysis by employing a wider array of comparative
statistical techniques and more recent methodologies and to

0378-4266/$ - see front matter Ó 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.jbankfin.2011.06.014
 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150
gain a greater understanding of the issues underlying such
speculations.1
Statistical methods alone cannot establish the existence of a
manipulation or a conspiracy in a particular market. That said,
our findings do flag some questionable patterns with respect to
the daily Libor quotes of the banks. Our analyses reveal that during
distinct periods of time, non-random patterns of reported borrow-
ing costs are in evidence beyond even the Wall Street Journal’s
findings. In particular, for the 7-month period that starts on Janu-
ary 1, 2007 with the beginning of our data and ends on August 8,
2007, the intraday variance of individual bank quotes is not signif-
icantly different from zero. Furthermore, the ‘‘critical group’’ of
banks which determine the Libor rate encompass the majority of
the institutions.
However, even assuming that the banks were artificially com-
pressing their quotes around a given point, it does not necessarily
follow that the resulting Libor was materially different from what
it otherwise would have been. Using statistical standards com-
monly accepted in US courts to determine materiality, our empir-
ical analysis indicates that the data are not consistent with a
material manipulation of the final Libor level.
This paper is organized in five sections. Section 1 provides
background information on the topic. Section 2 presents a literature
review of relevant theory and empirical methods, as well as infor-
mation regarding the compilation methodology of the Libor rate
which addresses the reputational considerations that are raised
by the Wall Street Journal article (Mollenkamp and Whitehouse,
2008). Section 3 discusses our own experimental methodology,
and Sections 4–6 describe our results, each devoted to a different
empirical hypothesis. Section 7 summarizes our key results and
concludes with a discussion of implications and avenues for future
research.
2. Literature review: the Libor rate, theory, and methods
2.1. The BBA and Libor
In 1984, the BBA initiated the standardization of contractual
terms on interest rate swaps. Two years later, the BBA introduced
Libor as a reference rate for a number of securities, notably syndi-
cated loans, futures contracts, and forward rate agreements. Today,
Libor serves as a reference rate for unsecured loans between Lon-
don based banks as well as for many financial instruments that
are transacted across the globe. Libor rates are quoted daily on
ten major currencies: the Australian dollar, British pound, Cana-
dian dollar, European euro, Danish krone, Japanese yen, New Zea-
land dollar, Swedish krona, Swiss franc, and US dollar. In this
study, we focus on the US dollar Libor.
The BBA selects 16 banks to provide daily rate quotes for the
calculation of Libor. According to the BBA’s website, this ‘‘reference
panel of banks . . . reflects the balance of the market by country and
by type of institution. Individual banks are selected within this
guiding principle on the basis of reputation, scale of market
activity, and perceived expertise in the currency concerned.’’ It is
noteworthy that these factors do not include any consideration
of net borrowing or lending positions. Because the ‘‘middle
eight’’ quotes are converted into Libor through a simple arithmetic
1
Such concerns are not unique to the recent periods of time that are examined in
this study. In 1999, for instance, the Wall Street Journal reports that ‘‘. . . the BBA
(recently) ran into criticism when investors complained that its Yen-Libor fixings
were skewed by unusually high quotes from some of the banks that contributed to
the fixings. In response, the BBA adjusted the bank roster for the Yen benchmark in
January.’’ (Cummings, 1999)
137
mean calculation,2 as few as five (of 16) banks, acting in concert,
could conceivably influence the published Libor rate.
What may motivate banks to artificially inflate or deflate the
published rate? From a financial perspective, banks that are net
borrowers would benefit from lower rates, while banks that are
net lenders would benefit from higher rates. Although an analysis
of the protocols employed to select Libor’s 16 banks is beyond the
scope of this study, the nature of the composition of this group
might generate an opportunity for collusion if the majority of these
banks tend to be net borrowers or lenders.3
Even if a bank is not trying to influence the published rate in
any particular direction, it may have incentives to artificially ad-
just its submitted quote relative to its peers. The Wall Street
Journal suggests that banks may use the Libor submission pro-
cess to manage their public reputation. In other words, they
may use the Libor calculation process to signal to the market
that their operating costs are lower (i.e., that they are financially
healthier) than they are in reality. If all banks submit artificially
low bids, this will of course lead to an artificially low published
rate. But instead of trying to signal an absolutely low level of
costs, it could be that the banks may wish to signal that their
borrowing costs are simply no higher than those of their peers.
This would suggest an artificial narrowing of the cross-sectional
variation in quotes, but it does not necessarily suggest that the
final published rate would be altered from what it otherwise
would have been.
Because Libor submissions are released to the general public,
banks may also be able to utilize the process to signal to each other
in much the same way as airlines are alleged to use their online
ticket reservation systems to communicate their pricing inten-
tions.4 This represents a third reason that individual quotes may
be artificially adjusted, but again it does not necessarily suggest a de-
sire to adjust the published rate. To use an analogy, such price sig-
naling could lead to a narrowing of the bid/ask spread but without
moving the midpoint.
Finally, banks which operate in multiple global markets may be
motivated to use Libor as a ‘‘hedge’’ (or, at a minimum, as an alter-
native financing resource) against rate fluctuations elsewhere. For
instance, an American bank with operations in London might ben-
efit by keeping the Libor rate artificially low as compared to the
Federal funds effective rate.
Each of these possible reasons supports an empirically testable
hypothesis. In some cases, we would expect the final published
Libor rate to be different (higher or lower) from what it otherwise
would have been. In other cases, we would expect the range of sub-
mitted quotes to be narrower than otherwise. In still other cases,
we would expect an increased wedge between Libor and other
comparable rates.
This study investigates the possibility of anticompetitive behav-
ior by the sixteen banks, or, at the least, a large enough subset
thereof. Such behavior though can manifest itself in many forms.
In this study, the term ‘‘manipulation’’ refers to potential anticom-
petitive behavior by the sixteen banks or a subset when acting on
their own, i.e., without implying any coordinated actions. The term
‘‘collusion’’ refers to behavior by the banks when acting as a group
in a coordinated manner, either explicitly or tacitly.
Why is it important to track the Libor? Given its extensive use,
with literally trillions of dollars of contracts benchmarked against
2
The quoted Libor rate on any given day is the simple average of the rates
submitted by the middle eight banks that is, the average after dropping the highest
and the lowest four rates.
3
See Mackenzie (2008) and Mollenkamp and Norman (2008) for recent critiques of
the Libor methodology. Gyntelberg and Wooldridge (2008) report anomalous Libor
behavior during the second half of 2007.
4
See Konrad and Sandoval (2002) for a critique of systems such as American
Airline’s Sabre, Delta’s Worldspan, and United’s Apollo.
138 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150
it, the economic consequences of a Libor manipulation could
potentially be extensive. For example, from a welfare standpoint,
if the level of Libor deviates from its market value, it will adversely
impact the efficient allocation of resources. For a too low level, bor-
rowers, such as homeowners, gain at the expense of lenders. A
more subtle allocative consequence is the distortion of other prices
in the economy. A lower Libor induces a lower mortgage rate, mak-
ing it easier to buy homes and substituting away from other goods
and services. This in turn artificially inflates the prices of homes
and related goods (such as furniture) while deflating the prices of
other goods.
But is it plausible, as Mollenkamp and Whitehouse (2008) con-
jecture, that the participating banks may ‘‘have been low-balling
their borrowing rates to avoid looking desperate for cash?’’ And
is it plausible, as the Financial Times speculates on June 2, 2008,
that the banks may have ‘‘understated true borrowing rates so as
not to fan fears (that) they have funding problems?’’ These state-
ments suggest that reputation is such a significant asset that a
bank may be willing to misrepresent its borrowing costs to
protect it.
2.2. Reputation
Although the Wall Street Journal and the Financial Times arti-
cles simply pose their questions suggestively, a review of the liter-
ature confirms that, historically, business reputation indeed serves
as an asset of significant value. Using a sample of initial bank notes
offered by new banks during the American Free Banking Era
(1838–1860), Gorton (1996) documents larger discounts for the
debt of new banks as compared to banks with maintained credit
histories. More recently, Livingston and Miller (2000) find that
bond underwriters with stronger reputation charge significantly
higher underwriting fees and provide higher offering prices (i.e.,
lower offering yields).
Furthermore, a bank’s reputation plays a major role in deter-
mining its profitability. For example, Fridson and Garman (1998)
note that pricing is materially affected by the effectiveness of
underwriters in presenting issuers to investors. Narayanan et al.
(2007) describe how commercial banks enhance their reputation
by extending their bond underwriting activities to syndicated
loans and private placements in the private debt market. More re-
cent research by Ahn and Choi (2009) finds that the reputation
(rank) of a lead bank serves as an indicator of bank monitoring
strength, which generally increases as the borrowing firm’s earn-
ings management behavior decreases. In each of these studies,
the authors demonstrate that a reputation for effectiveness is cor-
related with superior financial outcomes.
Thus, with reputation so well established as a valuable asset in
the research literature, it is reasonable to assume that institutions
may be tempted to engage in conspiracies and manipulations in or-
der to maximize the levels of respect and esteem accorded to them
by the business community. In other words, as noted by the Wall
Street Journal and the Financial Times, it is possible to suspect that
bankers may have harbored ‘‘fears’’ of ‘‘looking desperate’’ and
thus may have been willing to ‘‘low-ball their rates’’ in an anticom-
petitive manner in order to protect their reputations.
Empirical methods are developed and applied to screen for
markers that are associated with the existence of such activities.
Of course, there are sometimes false positives; markers can occur
in the absence of anticompetitive behavior. Likewise, collusions
and/or manipulations can occur in the absence of markers. Never-
theless, although screening activities cannot provide conclusive
evidence of the existence (or absence) of anticompetitive behavior,
they can be helpful in detecting patterns of observed data inconsis-
tent with what would be expected under competitive market
conditions.
2.3. Screening methods for anticompetitive behavior
In this section, we review empirical screening methods to de-
tect conspiracies and manipulations. A screen is a statistical test
designed to identify markets where competition may be lacking.
In some cases, a screen may be able to identify which firms or
agents are involved in a conspiracy or manipulation. Screens use
commonly available data such as prices, costs, market shares, bids,
transaction prices, spreads, volumes, and other data. Statistical
tools are then employed to identify patterns that are anomalous
or highly improbable. A literature review on screening methodolo-
gies and their multiple applications can be found in Abrantes-Metz
and Bajari (2010) and Harrington (2008). The use of these methods
in litigation is detailed in the 2010 volume Proof of Conspiracy un-
der Antitrust Federal Laws, by the American Bar Association.5
Economic analysis and empirical screening do trigger antitrust
cases, such as an Italian cartel in baby milk and a Dutch cartel in
the shrimp industry. Screens are also used to identify potential
anti-competitive behavior in gasoline markets by the Federal
Trade Commission, and to prioritize complaints in the Brazilian
gasoline retail market. Other agencies employing these tech-
niques include the Commodity Futures Trading Commission,
where screens for price manipulation in commodities markets
are used to detect and prevent such behavior in all active futures
and option contracts.
Two different examples described in Abrantes-Metz (2010) on
the power of these screens to detect anti-competitive behavior in
financial markets are the recent stock options backdating and
spring loading cases from the mid 2000’s and the 1994 break of
an alleged conspiracy by NASDAQ dealers in which odd-eighths
quotes were avoided. Both of these are triggered by the application
of screens to financial data.
Broadly speaking, the literature employs two screening strate-
gies. The first is to search for improbable events. This type of screen
is similar to looking for a ‘‘cheat’’ in a casino. For example, the
probability that a gambler at a Las Vegas casino will place a winning
bet in a roulette is roughly 0.5%. During a shift, a roulette dealer may
see a handful of players win five, or even seven, times in a row.
However, the probability of winning 20 times in a row is around 1
in a million. If a pit boss observes such an occurrence, he may not
be able to prove that cheating has occurred, and yet he would be
well advised to watch closely to avoid the risk of losing a significant
amount of money. One set of collusive screens generalizes this idea
by searching for events that are, under normal conditions, improb-
able unless agents in a market are coordinating their actions.
The second type of screen uses a control group. As an example,
during the 1980s, one study finds that the price of concrete is 70%
higher in New York City than in other US cities. While it is true that
the prices of many goods and services are somewhat higher in New
York City, relatively few of those prices are 70% higher than in
other large cities. It was later established that an organized crime
syndicate in New York City had been operating a concrete club that
rigged bids on contracts over $2 million. Prices that are anomalous,
compared to other markets, suggest a lack of competition. While
this example serves as an illustration, most collusion cases are
not as blatant.
It is important to emphasize that screens do not prove collusion
or manipulation. Instead, screens isolate outcomes that are
improbable or anomalous. A good screen possesses the following
properties: (i) it should minimize the number of false positives
and negatives; (ii) it should be easy to implement; (iii) it should
be costly to evade; and (iv) it should have empirical and/or
theoretical support.
5
Chapter VIII on the Role of the Economic Expert describes these methods in detail.
 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150
In theory, the alleged collusive and/or manipulative behavior
within the Libor process can be modeled as some combination
of: (1) a price-fixing conspiracy; (2) a bid-rigging conspiracy; and
(3) a market manipulation. These three types of screening tech-
niques are discussed in the next section.
2.4. Examples of screens for price-fixing conspiracies
A price-fixing conspiracy is defined as an agreement among
cartel members on one or more terms, commonly prices. Cartel
members may also agree on market share terms, as well as on pun-
ishment mechanisms for members who deviate from the terms of
the agreement. A number of empirical screens based on ‘‘collusive
markers’’ have been suggested for price-fixing conspiracies (Har-
rington, 2006). Collusive markers typically include: (a) higher than
expected average prices; (b) reductions in price variance; (c) lower
responsiveness of prices to costs; (d) reductions in price variations
across customers; (e) declines in imports of substitutes; (f) prices
that are strongly and positively correlated across firms or entities;
(g) a high degree of uniformity across firms in product prices and
other dimensions; and (h) abrupt changes in prices that cannot
be explained by demand and/or cost movements.
While these collusive markers vary in terms of ease of imple-
mentation, they all compare data patterns in a market against an
appropriate benchmark, developed within the same industry dur-
ing a different period, or from a comparable industry in a contem-
poraneous period. Abrantes-Metz et al. (2006), for instance, first
proposed a screen for low price variance to detect price-fixing
agreements, as observed around the collapse of a conspiracy in
the frozen perch industry.6
Competition authorities worldwide have adopted this variance
screen to identify markets with anomalously low price variance
(Abrantes-Metz and Froeb, 2008). Esposito and Ferrero (2006) doc-
ument the effectiveness of the variance screen methodology in
detecting collusion in the fuel and consumer products markets in
Italy.
An alternative screening approach makes use of price indices.
Indices can provide extremely good fits to observed prices. Simple
price indices are found to do an excellent job in explaining prices in
diverse markets such as real estate, computers, cars, and televi-
sions. Furthermore, the methods for constructing price indices
are fairly standard and robust. Finally, price indices are easy to ex-
plain, making them accessible to judges, attorneys and jurors.
Ewerhart et al. (2007) develop a microstructure model in which
commercial banks with strategic recourse to central bank standing
facilities may be expected to fix money market rates. Recent gov-
ernmental efforts to develop screening devices are described in
Abrantes-Metz and Froeb (2008).
2.5. Examples of screens for bid-rigging conspiracies
Markets that use competitive bidding are frequently very rich in
data. Such data have been used to evaluate whether a material con-
spiracy exists. Initial screens identify bidding patterns across auc-
tions which are highly improbable under competitive bidding.
Subsequent analyses compare bidding patterns in suspected mar-
kets against comparable competitive benchmarks.
In sealed auctions, when firms do not know each others’ bids,
the individual bids should reflect market conditions such as costs
and local market power, and perhaps the idiosyncrasies of specific
6
The authors find that the average price decreases by 16% and the volatility of this
price as measured by its standard deviation increases by over 200%. They also find
that these changes in price could not be explained by changes in cost, and that these
price patterns follow those of cost patterns more closely under competitive
conditions than under collusive conditions.
139
bidders. As a result, competitive bidding implies that bids will be
independent after controlling for common legitimate information
among all bidders. However, when firms collude, this coordination
involves another common factor due to the cartel agreement. This
common factor increases the correlation across bids with respect
to its value under competitive market conditions. Therefore, collu-
sive bids remain highly correlated even after controlling for costs
and market power variables.
The key question is thus: ‘‘How much positive correlation across
bids is sufficient to raise suspicion of collusion?’’ Sometimes the
correlation is so high that the likelihood that it could have been at-
tained without explicit coordination approaches zero. A famous
example involves the bids received by the Tennessee Valley
Authority to install conductor cables in the 1950s. During that pro-
cess, seven firms submit identical sealed bids of $198438.24. It is
highly unlikely that independent bidders could arrive at bid values
identical to eight digits.
More often, the correlation across bids is significantly higher
across bidders in one market, say market A, than across bidders
in another comparable market, say market B. If such a difference
in correlation between the two markets cannot be explained by
an observable and legitimate market condition relevant to firms
in A but not relevant (or observable) to firms in B, then it is more
likely that there is coordination across bidders in market A.
This type of pattern is illustrated in two papers by Porter and
Zona (1997, 1999). The authors provided expert testimonies for
the prosecution in the case of State of Ohio vs. Louis Trauth Dairies,
Inc. et al. The paper examines a set of 13 sealed bids submitted to
supply pint-size milk to Ohio schools between 1980 and 1990. The
bidders are milk processors or distributors, and school milk usually
represents less than 10% of their annual revenues. Porter and Zona
argue that a bidder’s costs can be easily explained by a small num-
ber of readily observed variables, including the price of raw milk
and local transportation costs. Using a simple econometric model,7
Porter and Zona show that the bids from non-colluding firms can be
explained by the model, while bids from allegedly colluding firms
are highly correlated and cannot be explained by the model. Yet an-
other type of screen for identifying bid-rigging conspiracies relies on
the economic prediction that bids should closely reflect costs in
competitive markets. When firms collude, they break the relation-
ship between bids and costs, with the objective of obtaining abnor-
mal profits. This divergence between bids and costs is evaluated by
comparing the relationship between bids and costs in the suspected
market against the relationship obtained in competitive markets.
This is consistent with the bid-rigging in the New York City concrete
market in the 1980s as discussed in Section 2.3.8
2.6. Examples of screens for other market manipulations
A market manipulation is, in general, quite different from a tra-
ditional price-fixing cartel in at least two ways: (a) it typically in-
volves fewer members, sometimes just a single firm, and (b) it does
not necessarily focus on maintaining a fixed price level per se. Its
7
Bid submission and bid level are modeled as a function of costs (controlled for by
the distance between a public school, the bidder’s location and the number of
deliveries made by the bidder), and local market power (controlled for by variables
measuring the locations of competing firms).
8
A related study by Bajari and Ye (2003) examines bids for seal coating by highway
contractors in the upper Midwest during the 1990s. Even though three of their sample
firms had been convicted of collusion in the previous decade, market observers
continue to believe that the industry is free of market wide collusion. In this market,
distance and backlog are important pricing determinants. Using a regression model
with a firm’s bid as the dependent variable and an engineering cost estimate, distance
from the project and backlog as explanatory variables, the authors find that bids
increase with both these measures, as would be expected under competition. The
evidence is consistent with two firms (out of 11) colluding. Both firms, incidentally,
were recently sanctioned for bid rigging.
140 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150
goal, for instance, might involve increasing price movements over a
period of time. Because members of such groups implement a di-
verse array of strategies and tactics, screening processes to detect
them are more individualized.
While the term ‘‘manipulation’’ is defined in many ways, the
various definitions share common features such as ‘‘causation’’
and ‘‘price artificiality’’ (Russo, 1983). This term is traditionally ap-
plied to the commodities markets where large price increases often
precede sudden price collapses.
Many approaches to detecting manipulation involve searching
for price distortions which cannot be explained by seasonality
and common demand and supply conditions. For example, a stan-
dard ‘‘red flag’’ for manipulations in futures markets is backwarda-
tion, i.e., a condition where the price of a futures contract is lower
than its spot or cash price, an inversion of the more typical contan-
go relationship.9
Recently, Abrantes-Metz and Addanki (2007) developed a new
method to screen for manipulations in markets for commodities.
They hypothesize that manipulations induce noise in the market
and distort market expectations about future prices. By defining
the price of a futures contract as the market’s expectation of the fu-
ture spot rate, and by applying their model to a well-known epi-
sode of manipulation in the silver market in 1979 and 1980, they
find that manipulation induces more volatile market forecasting
errors regarding future prices.10
Other screens are based on mathematical laws. In many data
sets, the distribution of digits has a natural, regularly occurring
pattern. Benford’s Law is a mathematical formula that describes
this regularly occurring distribution of digits. Studies have shown
that the law applies to a surprisingly large number of data sets
and it is commonly used in accounting to detect accounts manage-
ment.11 Recently, Abrantes-Metz et al. (2011) show that Benford’s
Law is violated for the US Libor rate most noticeably from January
1, 2007 through August 8, 2007. Consistency between the findings
from this Benford’s Law application and those in the current paper,
point to a possible change in the variance of the Libor rather than
to a material change in its average value.
The purpose of this study is to extend this field of academic re-
search by searching for markers that might signal inconsistencies
between the observed data and what should be expected under
competitive market conditions. By analyzing trends and patterns
9
While episodes of backwardation can occur in the absence of manipulation (e.g.
when supply is unable to meet unexpected demand despite the presence of
competitive market conditions), such episodes generally do not last for a long time.
Methods often used in legal practice to detect price artificiality conditions involve: (a)
comparing the allegedly manipulated price movements to those in previous periods,
(b) observing spreads between the allegedly manipulated futures contract and the
next closest contract and repeating (a), (c) evaluating the futures price with
equivalent futures on other exchanges and again repeating (a), and (d) determining
the relationship between the allegedly manipulated futures with cash prices when
the futures are close to delivery.
10
Another example of a screen for manipulation is presented by Pirrong (2004). This
study analyzes the alleged ‘‘cornering’’ of the soybean futures market in 1989 by
Ferruzzi, a large Italian conglomerate. Pirrong (2004) tests two hypotheses: (a) that
the price of the manipulated contract is significantly larger than the price of the
contracts expiring at a later date, a distortion that is often largest immediately before
the manipulator liquidates his position, and (b) that the expiring futures price and the
spot price at the delivery market are significantly larger than the prices at other, non-
deliverable locations. The results of this study are consistent with the hypothesis that
Ferruzzi exercises monopoly power, thereby creating an estimated price distortion of
5–10%.
11
Incidentally, Benford’s Law is also used to detect data tampering in taxes, in
financial ratios, and in survey data. Newcomb (1881) and Benford (1938) base this
law on an empirical observation that, in many naturally occurring data sets, the
leading significant digits are not uniformly distributed but instead follow a
logarithmic weak monotonic distribution. Judge and Schechter (2009), Nigrini
(2005), and others have subsequently applied Benford’s Law to this field of research.
Ashton and Hudson (2008) examine patterns of data streams to find instances of
interest rate clustering in UK financial services markets.
in individual bank quotes, we are able to assess whether the select
group of 16 banks (and/or some sub-groups therein) leave markers
that signal the possible existence of pricing conspiracies and/or
market manipulations.
3. Experimental methodology and hypotheses
3.1. Experimental methodology
The paper’s methodology is consistent with research that inves-
tigates potential anticompetitive behavior in real markets. Our
screening methodology focuses on identifying patterns that are un-
likely to have been reached under competition, and then examines
relationships between Libor and other variables, both at the macro/
aggregate and at the micro/individual levels.
At the aggregate level, we look into the relationship between
Libor and other major benchmarks, assuming those to be untainted
or non-manipulated at the time they are used as benchmarks.
Given that Libor is essentially constant for a period of at least
7 months, we test whether this pattern would have been predicted
given the historical relationship between Libor and other rates. Our
evidence is consistent with the absence of a material manipulation
of the average level of the Libor rate.
Next we examine the pattern of individual quotes. First, how
likely is it that a large number of banks will submit identical Libor
quotes without coordinating? In this context we look at the intra-
day variance of these individual quotes. Similarly to the bid-rigging
literature, we compute pairwise correlations between all possible
bank-pairs. We also calculate the frequency with which each bank
appears in the deciding group, and identify a core group of banks
that tend to be in the deciding group very often.
Finally, we study the relationships between individual Libor
quotes and proxies for individual borrowing costs as provided by
CDS spreads. Ceteris paribus, we may expect banks with higher bor-
rowing costs to have higher CDS spreads, and also higher Libor
quotes. We find that for some banks this is not necessarily the case,
and put forward plausible explanations.
We compare Libor with other short-term borrowing rates, ana-
lyze individual bank quotes, and compare these individual quotes
to CDS spreads and market capitalization data during three time
periods: 1/1/07–8/8/07 (Period 1), 8/9/07–4/16/08 (Period 2), and
4/17/08–5/30/08 (Period 3).12 The three periods are separated by
2 dates in which major news events occurred: (1) on August 9,
2007, there were three related press releases on (a) a coordinated
intervention by the European Central Bank, the Federal Reserve
Bank, and the Bank of Japan; (b) AIG’s warning that defaults were
spreading beyond the subprime sector; and (c) BNP Paribas’ suspen-
sion of three mortgage-backed funds; and (2) on April 17, 2008, the
BBA announced its intent to investigate its Libor-setting process.
Individual Libor quotes are analyzed from January 1, 2007
through May 30, 2008, while the level of the Libor itself is studied
from 1990 using Bloomberg data sources. After verifying that the
patterns are essentially the same for the 1- and the 3-month Libor
rates, in the paper we focus our attention on the 1-month Libor.
We also analyze other market indicators, both for the individual
Libor-setting banks and at the aggregate level. Our primary find-
ings are that, while there are some apparent anomalies within
the individual quotes, this evidence is not consistent with a mate-
rial manipulation of the average Libor rate during the period of
study. However, certain individual banks quotes exhibit some
unexpected patterns.
12
We should note that our data for banks’ individual quotes started only on January
1, 2007. It is possible that the patterns observed since 2007 may have started
sometime in 2006, but our analysis is restricted by data availability.
 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150
The rest of this section contains the following analyses: (a) a
comparison of Libor with other rates of short-term borrowing
costs, (b) an evaluation of the individual bank quotes, and (c) a
comparison of these individual quotes to individual CDS spreads.
To provide a clear presentation of our results, each of the three
subsections begins with a research proposition expressed in a null
hypothesis format, and ends with a conclusion that fails to affirm
or not the proposition.
3.2. Experimental hypotheses
Hypothesis H1. To conclude that the Libor rate is materially
manipulated in a downward direction during Period 2 (8/9/07
through 4/16/08), the spreads between Libor and other bench-
marks of borrowing costs would need to be statistically signifi-
cantly lower during that period than during Periods 1 or 3, since
the Libor typically takes higher values than the benchmark rates
used.
Thus, our Hypothesis H1 for this analysis (expressed as a null
hypothesis) is that these spreads during Period 2 are not statistically
significantly lower than these spreads in Periods 1 or 3.
We assume that neither the Federal funds effective rate, a rate
determined by actual exchanges between banks, nor the Treasury
bill rate, as directly determined in the market place, are simulta-
neously tainted by a possible Libor manipulation. Even if the Libor
rate is materially manipulated and in turn influences other rates,
that effect would likely not be contemporaneous and in exactly
the same proportion. Hence, we would expect a contemporaneous
comparison between an allegedly manipulated Libor and the other
benchmark rates to exhibit unusual patterns.
Procedurally, we adjust the actual (reported) Libor rate to re-
flect what the rate would have been ‘‘but for’’ any alleged manip-
ulation. If the adjusted (or estimated) Libor rate produces
spreads that are not statistically significantly lower during Period
2 than during Periods 1 or 3, we will not reject the null Hypothesis
H1.
Hypothesis H2. To conclude that the Libor rate is materially
manipulated during Period 2, the individual Libor quotes of
‘‘manipulative’’ banks should cluster together in non-random
patterns.
Thus, our Hypothesis H2 for this analysis (expressed as a null
hypothesis) is that no such clustering patterns are evident in any of
our three periods.
Procedurally, we review the individual Libor quote data, as well
as various other benchmark indicators of borrowing costs, for non-
random clustering patterns. Although such patterns would not
prove the presence of manipulation, they could ‘‘flag’’ such a
possibility.
According to the Wall Street Journal (Mollenkamp and
Whitehouse, 2008), the sixteen banks may ‘‘have been low-balling
their borrowing rates to avoid looking desperate for cash.’’ By that,
the Wall Street Journal means that during our Period 2, the banks
might have provided lower quotes than they should have, implying
that the reported Libor was effectively manipulated downwards.13
In this section we extend the Wall Street Journal’s analysis of
13
However, the Wall Street Journal does not present an analysis of the type we
conduct (i.e., an examination of the level of the Libor against a suitable ‘‘but-for’’
predictor), but instead examines patterns among the individual bank quotes. In
particular, the Wall Street Journal notes that the intraday variances for the bank
quotes are unusually small as compared to the intraday means since January 2008,
and suggests that this is evidence of a pattern of manipulation. They also investigate
the credit default swap (CDS) market and develop estimates of the banks’ ‘‘but-for’’
individual Libor quotes.
141
individual quotes in three ways by: (1) reviewing 2007 data, (2)
investigating CDS spreads for each bank in an ordinal rather than
in a cardinal fashion, and (3) studying other potentially relevant
indicators.Hypothesis H3 Next we study whether banks with rela-
tively low CDS spreads are also banks with relatively low Libor
quotes. A negative correlation between a bank’s Libor quote and
its CDS spread could indicate an inconsistency.
Thus, our Hypothesis H3 for this analysis (expressed as a null
hypothesis) is that no such inconsistencies are evident in any of our
three periods.
Procedurally, we review individual Libor quotes and CDS spread
data for any such unusual patterns among individual banks.
Although such patterns would not prove the presence of manipu-
lation, they could again flag such possibility.
In this subsection, we investigate the Wall Street Journal’s pre-
sumption that CDS spreads serve as effective benchmarks for
assessing the reasonableness of Libor quote data from which a
‘‘but for’’ individual Libor quote can be extracted. As stated by
the Wall Street Journal, the borrowing costs of banks are presumed
to be a function of their perceived conditions of solvency and finan-
cial strength. Pricing of CDS contracts is presumed to depend on
the bank’s financial strength, and thus serve as a useful indicator
of the cost of borrowing. Unlike the Wall Street Journal, we do
not use the CDS spread to estimate what the Libor quote should
have been, as we believe that these spreads encompass significant
noise. Instead, we investigate the ordinal relationships between
CDS spreads and quotes.
4. Results of tests of Libor and benchmarks (H1)
We begin by comparing the 1-month Libor against the 1-month
Treasury bill and the Federal funds effective rate.14 Fig. 1 presents
the January 2007 through May 2008 period for these rates. It is clear
that the Libor closely follows the other rate indicators for both matu-
rities. Analogous patterns are found for the 3-month Libor.
We continue this analysis by examining the spreads between
Libor and other rates; we focus our attention on the recent period
beginning January 2007. Fig. 2A shows the spread of 1-month Libor
over 1-month Treasury bill, separately identifying the mean spread
within the periods 1/1/07–8/8/07 (Period 1), 8/9/07–4/16/08
(Period 2), and after 4/17/08 (Period 3). Table 1 restates these time
period definitions.15
An increase in the spread beginning August 9, 2007 is evident,
and is statistically significant. Fig. 2B is a similar presentation of
the spread over the Fed funds effective rate; again we see a signif-
icant widening of this spread, beginning August 9. The same qual-
itative patterns are found for the 3-month Libor.
Table 2 presents summary statistics for graphs depicted in the
figures above and the t-statistics for the respective Libor spreads.
On August 9, 2007, three major news items were announced in
the press: (a) a ‘‘coordinated intervention’’ by the European Central
Bank, the Federal Reserve Bank, and the Bank of Japan; (b) an AIG
warning that defaults are spreading beyond the subprime sector,
and (c) BNP Paribas’ suspension of three funds that hold mort-
gage-backed securities. On the same day, a widening of spreads oc-
curs in terms of both the mean level and the variance. In short, it
would appear that there is a ‘‘structural break’’ on August 9 which
may explain the observed changes in these spreads. Furthermore,
we consider a second ‘‘structural break’’ on April 17, 2008, the
14
The effective rate is the weighted average of rates of actual exchanges between
banks.
15
Future researchers may wish to search for other structural breaks that are less
significant than these two breaks and occurring during the period of analysis. Any
such additional breaks, though, fall outside of the scope of this study.
142 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150

Libor 1m, Fed Funds Effective Rate and Treasury-Bill 1m

7.00

4/17/08
8/9/07
6.00

5.00

4.00

3.00

2.00

1.00

0.00

10/1/2007

11/1/2007

12/1/2007
1/1/2007

2/1/2007

3/1/2007

4/1/2007

5/1/2007

6/1/2007

7/1/2007

8/1/2007

9/1/2007

1/1/2008

2/1/2008

3/1/2008

4/1/2008

5/1/2008

6/1/2008
Libor 1m Fed Funds Effective Treasury-Bill 1m

Fig. 1. Libor 1 month, Fed funds effective rate and Treasury-bill 1 month.

Spread: LIBOR 1m over Treasury-Bill 1m

3.50
8/9/07 4/17/08

3.00

2.50

2.00

1.50

1.00

0.50

0.00
7

7
07

08
07

07
07

07

07

07

07

07

08

08

08

08
8
7
00

00

00
00
20

20

20
20

20

20

20

20

20

20
20
20

20

20
/2

/2

/2
/1/2
1/

1/

1/
1/

1/
1/

1/

1/

1/

1/
1/

1/
1/

1/
/1

/1

1/1
9/

6/
1/

2/

3/

4/

5/

6/

8/

2/
7/

3/

4/

5/
10

11

12

Fig. 2a. Spread: Libor 1 month over Treasury-bill 1 month.

day when the Wall Street Journal first published the news of the While it is true that spreads widened significantly beginning
BBA’s intent to investigate the accuracy of Libor quotes. August 9, 2007, these spreads are not necessarily and conclusively
suspicious. If it is true, as the Wall Street Journal alleges, that Libor
is manipulated downwards since January 2008 (i.e., during Period
2), the spreads of Libor over one or more of these other benchmark
Table 1
Time periods. rates would be significantly low. To test for this effect, we generate
an estimate of what the Libor would be ‘‘but for’’ this alleged
Time periods
manipulation. We study the relationship between the Libor rate
Period 1 January 2, 2007–August 8, 2007 and the Federal funds effective rate in a past (presumed) clean
Period 2 August 9, 2007–April 16, 2008
period. We assume that this untainted relationship would prevail
Period 3 April 17, 2008–May 30, 2008
during the suspected manipulative periods, and we then predict
 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150 143

Spread: LIBOR 1m over Fed Funds Effective Rate

2.00
8/9/07 4/17/08

1.50

1.00

0.50

0.00

-0.50

10/1/2007

11/1/2007

12/1/2007
1/1/2007

2/1/2007

3/1/2007

4/1/2007

5/1/2007

6/1/2007

7/1/2007

8/1/2007

9/1/2007

1/1/2008

2/1/2008

3/1/2008

4/1/2008

5/1/2008

6/1/2008
Fig. 2b. Spread: LIBOR 1 m over Fed funds effective rate.

Table 2
Summary statistics.

Libor 1-month
Treasury-bill spread Fed funds effective rate spread
Mean Stand deviation Coeff. variation Mean Stand deviation Coeff. variation
Period 1 0.395 0.243 0.616 0.064 0.03 0.469
Period 2 1.404 0.495 0.352 0.342 0.312 0.912
Period 3 1.069 0.642 0.6 0.532 0.165 0.31
Libor 1 month over Treasury-bill month Libor 1 month over Fed funds effective rate
Coeff. T-stat. T-(robust) Coeff. T-stat. T-(robust)
Intercept 0.395 11.648 5.414 0.064 3.573 24.724
8/9/07–4/16/08 1.009 21.738 12.157 0.279 11.433 5.203
4/17/08–5/30/08 0.335 4.259 1.429 0.189 4.577 2.699

the Libor rate, based on the observed Federal funds effective rate knowledge of the Federal funds effective rate is very helpful in
and the relationship between the two rates that we previously esti- predicting the Libor rate, as indicated by the very high adjusted
mated. Our last step is to test whether this ‘‘but-for’’ Libor rate is R-squared (0.98). If there is a structural break in one of the time
statistically different from the actual Libor rate to address whether series, a similar structural break should occur in the other time ser-
a material manipulation may have been in place. ies. The estimation period covers two major cycles, and the two rates
The Federal funds effective rate is the interest rate at which respond in a very similar fashion. We can also see that there is essen-
banks (and other depository institutions) lend balances through tially no statistical or numerical difference between the contempora-
the Federal Reserve Bank to other depository institutions; it neous and the lagged 1 day relationships.18 Further lags of the
represents an overnight rate. It thus serves as a primary short-term Federal funds effective rate are also tested and qualitatively equiva-
borrowing rate between banks, allegedly untainted and therefore a lent results are produced.19,20
suitable candidate for a benchmark for our study.16 This relationship between the Libor rate and the Federal funds
We first estimate the 1-month Libor as a function of a constant effective rate may be viewed strictly as a reduced-form predictive
term and of the Federal funds effective rate from 1987 through relationship. We are not focused on arguments about ‘‘causation’’
2006.17 We consider both contemporaneous and lagged relation-
ships. These regression results presented in Table 3 show that the
18
correlation level between these two rates is very strong, and that The same is true for higher levels of lags introduced.
19
The ‘‘robust’’ t-statistics are based on a modified White standard error adjusted to
account for serial correlation, derived as the General Method of Moments covariance
matrix.
16 20
We should note that other rates such as the Overnight Indexed Swap Rate and Granger causality tests, not reported herein, indicate that each series Granger
results are qualitatively identical. causes the other. On the other hand, a variance decomposition analysis, performed
17
We recognize that if any alleged anticompetitive behavior started occurring under the assumption that shocks to the Fed funds effective rate have no
before January 1, 2007, the inclusion of the data up to December 31, 2006 in our contemporaneous impact on Libor, indicates that innovations to the Libor rate
‘‘presumably clean’’ pre-period could potentially bias some econometric results. But account for 91.0% of the long-run (1000 day) variance in Libor and 88.7% of the
unless such distortions occurred for a very long period of time prior to 2007 or/and variance in the Fed funds effective rate. It should be noted, however, that as the Fed
were very pronounced, it is unlikely that estimates will be significantly affected given funds effective rate is strongly influenced by a policy rate, it is not obvious that the
the very large time series data studied and presumably untainted. requisite conditions of stationarity are met in this case.
144 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150

Actual and Predicted Libor 1m, based on Fed Funds Effective Rate
7.00

8/9/07

4/17/08
6.00

5.00

4.00

Estimation Window: 7/13/90 - 31/12/06

3.00 Projected Window: 1/1/07 - 30/5/08

Model: Regress Libor 1 month onto Fed Funds

Effective Rate
2.00
Constant = 0.17
Slope = 1

R-Squared = 0.98
1.00

0.00
1/1/2007

2/1/2007

3/1/2007

4/1/2007

5/1/2007

6/1/2007

7/1/2007

8/1/2007

9/1/2007

1/1/2008

2/1/2008

3/1/2008

4/1/2008

5/1/2008

6/1/2008
10/1/2007

11/1/2007

12/1/2007
Actual Libor 1m Predicted Libor 1m 95% Confidence Interval 95% Confidence Interval

Fig. 3. Actual and predicted Libor 1 month, based on Fed funds effective rate.

or ‘‘exogeneity.’’ We simply note that, historically, if one knows the 2007 is evident. The intraday coefficients of variation (equal to
Federal funds effective rate (that day or the preceding day), one can the standard deviation divided by the mean of the Libor quotes
form a very accurate guess about the Libor rate as well. for the banks on a daily basis) significantly increase during Period
Next we estimate the historical relationship using data through 2 and remain high throughout Period 3.
the end of 2006, to predict the 1-month Libor from January 2007 It appears that the individual quotes are very tightly clustered
onwards, given the Federal funds effective rate for Periods 1, 2 in Period 1 relative to the later periods. Period 1 volatility levels,
and 3, as previously defined. The intuitive rationale is a simple demonstrating nearly identical quotes on a daily basis, provide a
one: if the Libor rate has been effectively manipulated upwards candidate for a conspiracy in fixing the level of the Libor rate, (at
or downwards, it should manifest itself as a break in the histori- least) as early as January 2, 2007 (possibly before) and until August
cally powerful predictive relationship between the two rates. Our 8, 2007. Although it is not clear why the banks might manipulate
results are presented in Fig. 3. their quotes for such an extended period of time, the very low var-
When comparing the actual Libor for the post-2007 period iability in the intraday quotes during Period 1 appears to be anom-
against the projected Libor based on the historical relationship alous, in particular when that implies an essentially constant Libor
between the Libor and the Federal funds effective rate through rate for the entire period. Nevertheless, we previously found that
December 2006, we find that after January 2007 and through on average the Libor level does not seem to be materially impacted,
May 2008 the actual Libor is not significantly different from its pre- given that the Libor level does not significantly differ from what it
dicted values based on our simple model, and for each of the three ‘‘should have been’’ when benchmarking against the Federal funds
periods that we consider. In other words, the empirical evidence is effective rate (though other moments, such as the variance rather
not consistent with the hypothesis that the average values of the than the mean, may have been affected).
Libor rate are materially manipulated downward during Period 2, The Libor is established as the simple average of the middle set
as the Wall Street Journal alleges. Similar results are found when of eight quotes that are submitted by the sixteen participating
studying the 3-month Libor series, and also when using other banks. In other words, the BBA ranks the quotes from 1st to 16th
benchmark rates. and then calculates Libor as the average of the 5–12th quotes. If
In sum, the null hypothesis of H1 is not rejected. The statistical several banks submit identical quotes, more than eight banks
evidence is not consistent with a material manipulation of the may produce quotes that are tied for 5th place or 12th place; i.e.,
Libor rate. more than eight banks on any given day may join the deciding
group.
5. Results of tests of individual bank quotes (H2) Table 4 reports summary statistics on rates of inclusion in the
deciding group by period for the 1-month Libor. We report: (a)
Fig. 4 shows the cross-sectional coefficients of variation of indi- how often each bank joins the deciding group, (b) how often each
vidual 1-month Libor quotes, distinguishing the entire set of 16 bank submits a quote lower than the deciding set, (c) how often
banks from the ‘‘deciding group’’ of eight which determine the ac- each bank submits a higher quote, and (d) how often each bank
tual Libor. Again, similar patterns are also found for the 3-month submits a quote that is less than or equal to the median quote
Libor. Once again, a structural break which begins on August 9, on each day.
 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150 145

During Period 1, a somewhat surprising result emerges: the vast
majority of the banks join the deciding group more than 95% of the
time. Owing to the large number of identical quotes, this finding
produces the very low intraday variance mentioned above. In par-
ticular, BTMU, JPM Chase, Citigroup, HSBC, West LB, Royal Bank of
Canada and CSFB are members of the deciding group virtually each
day. This nearly perfect participation rate is followed closely by a
second group: HBOS, Lloyds, and UBS AG. This group is distantly
followed by a single bank, Barclays, which participates about 50%
of the time. The Royal Bank of Scotland participates the least often,
at a rate of approximately 5%. It would thus appear that the com-
position of the deciding group is relatively constant during Period
1, a period with many instances when more than eight banks
determine the Libor due to identical quote submissions.

Libor 1m: Cross-Sectional Coefficient of Variation for Banks Quotes

0.01
8/9/07 4/17/08

0.01

0.01

0.01

0.01

0.00

0.00

0.00
7
7

7
07
07

07
07

07

07

08

08
07

08

08

08
07

07

00

00

00
20
20

20
20

20

20

20

20

20

20

20
20
20

20

/2

/2

/2
2/

2/

2/

2/

2/

2/
2/

2/
2/

2/

2/

2/

2/
2/

/2

/2

/2
1/

7/

9/

1/

3/
2/

3/

4/

5/

6/

8/

2/

4/

5/
10

11

12

All 16 Banks Deciding Group

Fig. 4. Libor 1 month: cross-sectional coefficient of variation for banks’ quotes.

Table 3
Regression results.

Libor 1-month
Libor 1 month (t) on Fed funds effective rate (t) Libor 1 month (t) on Fed funds effective rate (t 1)
Coeff. T-stat. T-(robust) Coeff. T-stat. T-(robust)
Intercept 0.1692 18.37 7.05 0.1691 18.38 6.88
Fed funds E rate (t) 0.997 577.74 178.95 0.9969 578.82 174.59
# Observations 5159 5158
Adjusted R-squared 0.9848 0.9848

Table 4
Percent in deciding group.

Percent in deciding group Percent below Percent above Percent in low half
Period 1 Period 2 Period 3 Period 1 Period 2 Period 3 Period 1 Period 2 Period 3 Period 1 Period 2 Period 3
BTMU 99.3 75.3 13.3 0.0 0.0 0.0 0.7 24.7 86.7 99.3 31.6 3.3
Bank of America 92.8 70.1 23.3 4.6 10.9 76.7 2.6 19.0 0.0 97.4 55.7 93.3
Barclays 55.6 45.4 53.3 0.0 0.0 0.0 44.4 54.6 46.7 55.6 23.6 26.7
JPM Chase 98.0 89.1 56.7 0.0 9.2 43.3 2.0 1.7 0.0 98.0 80.5 93.3
Citigroup 99.3 61.5 93.3 0.7 37.4 3.3 0.0 1.1 3.3 100.0 93.1 90.0
CSFB 99.3 77.6 86.7 0.0 7.5 3.3 0.7 14.9 10.0 99.3 58.0 76.7
Deutsch Bank 94.8 21.8 20.0 3.9 75.9 76.7 1.3 2.3 3.3 98.7 96.0 96.7
HBOS 96.7 80.5 86.7 3.3 2.3 0.0 0.0 17.2 13.3 100.0 50.0 56.7
HSBC 98.0 67.8 86.7 1.3 30.5 0.0 0.7 1.7 13.3 99.3 88.5 50.0
Lloyds 96.1 78.7 53.3 0.0 4.0 46.7 3.9 17.2 0.0 96.1 55.2 100.0
Norinchukin 85.0 33.3 10.0 0.0 0.6 0.0 15.0 66.1 90.0 85.0 13.8 6.7
Rabo Bank 75.8 48.3 46.7 0.0 50.0 53.3 24.2 1.7 0.0 75.2 91.4 100.0
Royal Bank of Canada 98.0 87.4 80.0 1.3 7.5 6.7 0.7 5.2 13.3 98.7 66.1 70.0
Royal Bank of Scotland 4.6 61.5 80.0 95.4 33.9 6.7 0.0 4.6 13.3 100.0 86.8 66.7
UBSAG 96.7 59.2 86.7 2.0 38.5 6.7 1.3 2.3 6.7 98.7 92.0 76.7
West LB 99.3 93.1 70.0 0.7 0.6 0.0 0.0 6.3 30.0 100.0 60.9 40.0
Table 5

146
Banks’ pairwise participation rates.

BTMU Bank of Barclays JPM Citigroup CSFB Deutsch HBOS HSBC Lloyds Norinch Rabo Bank Royal Bank Royal Bank UBS AG West LB
America Chase Bank of Canada of Scotland
Banks pairwise participation rates, 2/1/07–8/8/07
BTMU 100.0 93.4 55.3 98.7 99.3 99.3 94.7 96.7 98.0 96.1 84.9 75.7 98.0 4.6 96.7 99.3
Bank of America 100.0 100.0 52.8 98.6 99.3 99.3 95.1 96.5 98.6 97.2 85.2 73.9 98.6 4.2 97.2 99.3
Barclays 98.8 88.2 100.0 97.6 98.8 98.8 95.3 95.3 98.8 97.6 72.9 88.2 100.0 2.4 97.6 100.0
JPM Chase 100.0 93.3 55.3 100.0 99.3 100.0 94.7 96.7 98.0 96.0 85.3 76.7 98.0 4.7 96.7 99.3
Citigroup 99.3 92.8 55.3 98.0 100.0 99.3 94.7 96.7 98.0 96.1 85.5 76.3 98.0 4.6 97.4 99.3
CSFB 99.3 92.8 55.3 98.7 99.3 100.0 94.7 96.7 98.0 96.1 85.5 76.3 98.0 4.6 96.7 99.3
Deutsch Bank 99.3 93.1 55.9 97.9 99.3 99.3 100.0 97.2 98.6 98.6 84.1 75.9 100.0 2.8 98.6 100.0
HBOS 99.3 92.6 54.7 98.0 99.3 99.3 95.3 100.0 98.6 95.9 85.1 75.0 98.6 4.1 97.3 100.0
HSBC 99.3 93.3 56.0 98.0 99.3 99.3 95.3 97.3 100.0 97.3 84.7 75.3 98.7 3.3 97.3 99.3
Lloyds 99.3 93.9 56.5 98.0 99.3 99.3 97.3 96.6 99.3 100.0 84.4 76.2 99.3 2.7 98.0 99.3
Norinchukin 99.2 93.1 47.7 98.5 100.0 100.0 93.8 96.9 97.7 95.4 100.0 77.7 97.7 5.4 97.7 99.2
Rabo Bank 99.1 90.5 64.7 99.1 100.0 100.0 94.8 95.7 97.4 96.6 87.1 100.0 98.3 4.3 97.4 99.1

R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150

Royal Bank of Canada 99.3 93.3 56.7 98.0 99.3 99.3 96.7 97.3 98.7 97.3 84.7 76.0 100.0 3.3 98.7 100.0
Royal Bank of Scotland 100.0 85.7 28.6 100.0 100.0 100.0 57.1 85.7 71.4 57.1 100.0 71.4 71.4 100.0 71.4 85.7
UBS AG 99.3 93.2 56.1 98.0 100.0 99.3 96.6 97.3 98.6 97.3 85.8 76.4 100.0 3.4 100.0 100.0
West LB 99.3 92.8 55.9 98.0 99.3 99.3 95.4 97.4 98.0 96.1 84.9 75.7 98.7 3.9 97.4 100.0

Banks pairwise participation rates, 8/9/07–4/16/08

BTMU 100.0 71.8 48.9 89.3 59.5 77.9 22.1 77.9 71.0 81.7 35.1 45.8 88.5 60.3 56.5 93.1
Bank of America 77.0 100.0 41.0 86.9 64.8 81.1 20.5 78.7 72.1 75.4 28.7 45.9 86.9 60.7 63.1 94.3
Barclays 81.0 63.3 100.0 92.4 67.1 74.7 16.5 77.2 77.2 77.2 29.1 53.2 86.1 55.7 54.4 88.6
JPM Chase 75.5 68.4 47.1 100.0 57.4 78.1 22.6 81.3 66.5 78.7 31.6 49.7 88.4 62.6 58.7 92.3
Citigroup 72.9 73.8 49.5 83.2 100.0 82.2 16.8 79.4 65.4 76.6 34.6 45.8 86.0 55.1 57.9 91.6
CSFB 75.6 73.3 43.7 89.6 65.2 100.0 21.5 83.0 65.2 77.0 33.3 45.9 87.4 59.3 60.0 91.9
Deutsch Bank 76.3 65.8 34.2 92.1 47.4 76.3 100.0 84.2 55.3 73.7 26.3 42.1 94.7 63.2 65.8 94.7
HBOS 72.9 68.6 43.6 90.0 60.7 80.0 22.9 100.0 66.4 78.6 36.4 50.0 87.1 62.9 60.0 92.9
HSBC 78.8 74.6 48.3 87.3 59.3 74.6 17.8 78.8 100.0 78.8 31.4 52.5 85.6 56.8 56.8 92.4
Lloyds 78.1 67.2 44.5 89.1 59.9 75.9 20.4 80.3 67.9 100.0 35.8 44.5 86.9 59.1 58.4 94.2
Norinchukin 79.3 60.3 39.7 84.5 63.8 77.6 17.2 87.9 63.8 84.5 100.0 48.3 89.7 69.0 56.9 91.4
Rabo Bank 71.4 66.7 50.0 91.7 58.3 73.8 19.0 83.3 73.8 72.6 33.3 100.0 86.9 61.9 50.0 91.7
Royal Bank of Canada 76.3 69.7 44.7 90.1 60.5 77.6 23.7 80.3 66.4 78.3 34.2 48.0 100.0 63.2 59.2 94.1
Royal Bank of Scotland 73.8 69.2 41.1 90.7 55.1 74.8 22.4 82.2 62.6 75.7 37.4 48.6 89.7 100.0 56.1 92.5
UBS AG 71.8 74.8 41.7 88.3 60.2 78.6 24.3 81.6 65.0 77.7 32.0 40.8 87.4 58.3 100.0 95.1
West LB 75.3 71.0 43.2 88.3 60.5 76.5 22.2 80.2 67.3 79.6 32.7 47.5 88.3 61.1 60.5 100.0

Banks pairwise participation rates, 4/17/08–5/30/08

BTMU 100.0 0.0 25.0 75.0 75.0 75.0 25.0 50.0 100.0 25.0 75.0 50.0 75.0 50.0 100.0 50.0
Bank of America 0.0 100.0 57.1 71.4 85.7 85.7 14.3 85.7 85.7 28.6 0.0 28.6 100.0 85.7 100.0 42.9
Barclays 6.3 25.0 100.0 56.3 87.5 93.8 18.8 87.5 87.5 68.8 6.3 37.5 68.8 68.8 81.3 75.0
JPM Chase 17.6 29.4 52.9 100.0 88.2 94.1 29.4 82.4 94.1 52.9 11.8 41.2 88.2 76.5 88.2 52.9
Citigroup 10.7 21.4 50.0 53.6 100.0 85.7 17.9 89.3 85.7 57.1 7.1 46.4 82.1 82.1 85.7 71.4
CSFB 11.5 23.1 57.7 61.5 92.3 100.0 23.1 84.6 84.6 57.7 7.7 42.3 76.9 76.9 84.6 65.4
Deutsch Bank 16.7 16.7 50.0 83.3 83.3 100.0 100.0 66.7 100.0 33.3 16.7 33.3 66.7 83.3 83.3 66.7
HBOS 7.7 23.1 53.8 53.8 96.2 84.6 15.4 100.0 84.6 57.7 7.7 46.2 84.6 84.6 84.6 69.2
HSBC 15.4 23.1 53.8 61.5 92.3 84.6 23.1 84.6 100.0 53.8 11.5 46.2 84.6 80.8 84.6 65.4
Lloyds 6.3 12.5 68.8 56.3 100.0 93.8 12.5 93.8 87.5 100.0 0.0 43.8 75.0 68.8 87.5 68.8
Norinchukin 100.0 0.0 33.3 66.7 66.7 66.7 33.3 66.7 100.0 0.0 100.0 66.7 66.7 66.7 100.0 66.7
Rabo Bank 14.3 14.3 42.9 50.0 92.9 78.6 14.3 85.7 85.7 50.0 14.3 100.0 78.6 71.4 85.7 78.6
Royal Bank of Canada 12.5 29.2 45.8 62.5 95.8 83.3 16.7 91.7 91.7 50.0 8.3 45.8 100.0 83.3 83.3 62.5
Royal Bank of Scotland 8.3 25.0 45.8 54.2 95.8 83.3 20.8 91.7 87.5 45.8 8.3 41.7 83.3 100.0 91.7 75.0
UBS AG 15.4 26.9 50.0 57.7 92.3 84.6 19.2 84.6 84.6 53.8 11.5 46.2 76.9 84.6 100.0 69.2
West LB 9.5 14.3 57.1 42.9 95.2 81.0 19.0 85.7 81.0 52.4 9.5 52.4 71.4 85.7 85.7 100.0
 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150 147

These patterns change significantly during Period 2. The compo- Table 6

sition of the deciding group becomes less stable. Although JPM Correlation between quotes and CDS spreads.

Chase and West LB continue to experience relatively high partici- Period 1 Period 2 Period 3
pation rates, they are significantly less than their Period 1 rates. Correlation between quotes and CDS spreads
Conversely, the participation rate of the Royal Bank of Scotland BTMU 0.58 0.76 0.50
soars to approximately 60%, while the rate of Deutsche Bank plum- Bank of America 0.53 0.85 0.44
mets to about 21%. Barclays 0.58 0.82 0.35
JPM Chase 0.51 0.84 0.41
These patterns change, once again, during Period 3. The partic- Citigroup 0.58 0.85 0.00
ipation rate of JPM Chase declines significantly, while the rates of CSFB 0.57 0.82 0.16
Citigroup and the Royal Banks of Canada and Scotland increase. Deutsch Bank 0.19 0.79 0.24
To test the stability of the deciding group in each Period, we HBOS 0.46 0.84 0.18
HSBC 0.52 0.86 0.39
now explore the joint (pairwise) inclusion of banks. In other words,
Lloyds 0.71 0.89 0.24
for any given reference bank, we ask the question, ‘‘when this bank Norinchukin NaN NaN NaN
joins the deciding group, how often do each of the other banks also Rabo Bank 0.24 0.88 0.15
join the group?’’ The results are presented in Table 5 for the Royal Bank of Canada NaN NaN NaN
1-month Libor, with very similar results presented for the 3-month Royal Bank of Scotland NaN NaN NaN
UBSAG 0.40 0.85 0.18
Libor.
West LB 0.71 0.85 0.51
For example, when we report 93.4% in row ‘‘BTMU’’ and column
Correlation between quotes and market cap.
‘‘Bank America’’ for Period 1, it should be interpreted as ‘‘when
BTMU NaN NaN NaN
BTMU is in the deciding group, Bank of America joins the group Bank of America 0.14 0.78 0.73
93.4% of the time’’. Note that this matrix is not symmetric. For in- Barclays 0.05 0.84 0.85
stance, by reviewing the row ‘‘Bank of America’’ and column JPM Chase 0.30 0.36 0.53
Citigroup 0.30 0.85 0.78
‘‘BTMU,’’ we note that each time Bank of America joins the group,
CSFB 0.19 0.85 0.37
BTMU does so as well. From this sequence of tables, we can identify Deutsch Bank 0.00 0.81 0.67
groups of banks that tend to cluster together in each of the three HBOS 0.22 0.91 0.77
periods in order to form the deciding group. HSBC 0.21 0.68 0.03
As expected, we see many joint inclusion rates in excess of 90% Lloyds 0.00 0.78 0.88
Norinchukin NaN NaN NaN
during Period 1, including several that exceed 99%. These rates fall
Rabo Bank NaN NaN NaN
significantly in Period 2, when we fail to see a single pairwise Royal Bank of Canada 0.06 0.58 0.89
inclusion rate of 100%. Period 3, though, is mixed, with an average Royal Bank of Scotland 0.12 0.91 0.46
pairwise inclusion rate that is lesser in comparison to Period 1, but UBSAG 0.19 0.93 0.75
West LB NaN NaN NaN
greater in comparison to Period 2. It should be noted that Period 3
contains significantly fewer days than do Periods 1 or 2.
Thus, the null hypothesis of H2 is rejected. Although the non-
random clustering patterns that we detect in this section cannot creditors whole for the future. Such situation can only occur in se-
establish the presence of a conspiracy or manipulation, they do vere macroeconomic conditions. Therefore, it is possible for the lar-
‘‘flag’’ such a possibility. ger banks to present higher CDS spreads without necessarily having
a higher physical probability of default.
6. Results of tests of consistency of bank quotes with CDS Fig. 5 plots the CDS spreads on 5-year senior bonds from Janu-
spreads (H3) ary 2007 onwards. Apparently, consistent with the trend of Libor
quotes, the spreads are much more compressed in Period 1 than
Table 6 presents the correlations between individual bank’s Li- in later periods. Furthermore, Fig. 5 also clearly shows that the dai-
bor quotes and CDS spreads for each of the three periods, and also ly dispersion of CDS spreads increases significantly in Periods 2 and
between quotes and bank’s market capitalization (i.e., size). 3 with respect to Period 1, a pattern that also exists in the banks’
Of course, there are many reasons why significant discrepancies daily Libor quotes.
may exist between CDS spreads and short-term borrowing costs. Additionally, we compare the ordinal content of the CDS spread
For instance, the time horizons of interest may be different, i.e., a data with the individual Libor quotes. Specifically, for each period
creditor may believe that a bank is fully able to meet its obligations we compare: (a) the percentage of the time that each bank’s CDS
over the next 30 days and thus may lend to it at a low rate during spread is less than or equal to the median spread, with (b) the per-
that time, but may doubt the borrower’s ability to meet its obliga- centage of the time that each bank’s Libor quote is less than or
tions over the next 5 years. If there is significant segmentation be- equal to the median rate. Our results are presented in Table 7.
tween short- and long-term markets, then there may be additional We are interested in ‘‘outliers,’’ defined as banks which consis-
liquidity premia associated with a specific CDS contract.21 These tently provide relatively low Libor quotes while exhibiting rela-
(and many other) observations notwithstanding, it is reasonable to tively high CDS spreads. During Period 1, JPM Chase, CSFB, and
expect ceteris paribus that a ‘‘riskier’’ bank should have higher bor- Deutsche Bank meet this criterion. Their Libor quotes are always
rowing costs and an accompanying higher CDS spreads than a ‘‘less essentially less than or equal to the median, but their CDS spreads
risky’’ bank. Nevertheless, we should note that it is possible for more are never less than or equal to the median. Bank of America’s
systemic risk to be incorporated in the CDS spreads for the largest quotes are quite similar, with low Libor quotes 97% of the time
banks than for the smallest. The realization of a default by a large but low CDS spreads only 2.6% of the time. Citigroup’s quotes are
bank means that the bank itself not only fails, but that it also does low 100% of the time, but its CDS spreads are low only 3.3% of
not receive sufficient support from a sovereign to make its long term the time.22 In sum, this cross-sectional analysis reveals that banks

21
If, in fact, such segmentation between short-term and long-term investments
exists in this market, a comparison of the (short-term) Libor rate against other short
term borrowing rates paid by the banks at similar time horizons, such as commercial
paper, may represent a fairer comparison.
22
An exploratory analysis for West LB produces results that are consistent with
(albeit less significant than) the results that are generated by these other banks. The
quotes by West LB are low 36.6% of the time, but its CDS spreads are only low 0.7% of
the time.
148 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150

CDS Spreads, Senior 5 years

January 2, 2007 - May 30, 2008
300
8/9/07 4/17/08
250
CDS Spreads
200

150

100

50

10/2/2007

11/2/2007

12/2/2007
1/2/2007

2/2/2007

3/2/2007

4/2/2007

5/2/2007

6/2/2007

7/2/2007

8/2/2007

9/2/2007

1/2/2008

2/2/2008

3/2/2008

4/2/2008

5/2/2008
BTMU Bank of America Barclays JPM Chase
Citigroup CSFB Deutschbank HBOS
HSBC Lloyds Rabobank Royal Bank of Scotland
UBS AG West LB

Fig. 5. CDS spreads, senior 5 years.

Table 7
CDS spreads, market capitalizations and Libor quotes.

CDS spreads Market cap. Libor quotes

Percent in low half Percent in low half Percent in low halfa
Period 1 Period 2 Period 3 Period 1 Period 2 Period 3 Period 1 Period 2 Period 3
BTMU 68.0 98.3 100.0 NaN NaN NaN 96.7 36.2 3.3
Bank of America 2.6 41.4 16.7 0.0 0.0 0.0 97.4 58.0 93.3
Barclays 94.1 45.4 63.3 100.0 100.0 100.0 55.6 26.4 23.3
JPM Chase 0.0 32.8 6.7 0.0 0.0 0.0 98.0 85.1 93.3
Citigroup 3.3 8.0 0.0 0.0 0.0 0.0 100.0 92.5 86.7
CSFB 0.0 42.5 70.0 99.3 99.4 100.0 99.3 61.5 76.7
Deutsch Bank 0.0 64.9 100.0 100.0 98.9 100.0 98.7 96.0 96.7
HBOS 99.3 8.0 0.0 100.0 100.0 100.0 99.3 54.0 53.3
HSBC 84.3 98.9 100.0 0.0 0.0 0.0 99.3 90.8 46.7
Lloyds 100.0 99.4 100.0 100.0 100.0 100.0 96.1 59.2 100.0
Norinchukin NaN NaN NaN NaN NaN NaN 85.0 13.8 6.7
Rabo Bank 100.0 100.0 100.0 NaN NaN NaN 75.2 91.4 100.0
Royal Bank of Canada NaN NaN NaN 100.0 97.7 76.7 98.7 66.1 70.0
Royal Bank of Scotland NaN NaN NaN 0.0 0.0 3.3 100.0 86.8 66.7
UBSAG 83.7 59.8 46.7 0.0 4.0 20.0 98.7 93.1 76.7
West LB 0.7 1.7 0.0 NaN NaN NaN 36.6 66.1 36.7
a
Computed only among the 13 banks for which we also have CDS spreads and market cap. data.

with low Libor quotes do not necessarily enjoy low CDS spreads dur- we note that many of the ‘‘outlier’’ banks are relatively large as de-
ing Period 1. fined by their market capitalization. In other words, as shown in
During Period 2, for instance, Libor quotes of Citigroup and Table 7, very large banks appear to have borrowing costs that are
HBOS are low 93% and 54% of the time, respectively, but their low in relation to their CDS spreads. In Period 1, for instance, the
CDS spreads are low only 8% of the time. The rate quotes of West low borrowing costs of JPM Chase and Citigroup may provide a po-
LB are low 66.1% of the time, but its CDS spreads are low only tential explanation for the disparities that are found when compar-
1.7% of the time. Similarly, the Libor quotes of JPM Chase are low ing their CDS spreads with their Libor quotes.
85.1% of the time, but its CDS spreads are low only 32.8% of the Why may this be true? One explanation is that larger banks may
time.23 Similar examples are found during Period 3. be able to obtain ‘‘volume discounts’’ and thus may have the ability
These results suggest that either: (a) CDS spreads are not effec- to borrow at lower rates than smaller banks due to their higher
tive ordinal indicators of borrowing costs, or (b) the sample banks bargaining power. But it may also be that their systemic risk is sig-
are unusual and atypical in some manner, or (c) that the portion of nificantly higher than that of smaller banks. Other explanations, of
systemic risk in the larger banks’ CDS spreads is significantly larger course, are possible as well, and deserve additional study in future
than in the smaller banks’ CDS spreads, so that a higher CDS spread research.
may well be consistent with a lower Libor rate quote by a large Next, we discuss our use of credit ratings as reflecting the credit
bank. Although this question falls beyond the scope of our analysis, premium of the participating banks. In particular, we look at mar-
ket implied ratings. The first aspect to keep in mind is that credit
ratings are designed to be stable over time (i.e., stable for at least
23
Interestingly, BTMU serves as an outlier on the ‘‘high side.’’ Its quotes are high many months or even years), and hence do not respond to market
36.2% of the time, but its CDS spreads are low 98% of the time. conditions at a high frequency. Second, higher ratings tend to be
 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150 149

Coefficient of Variation of Market-Implied Bond Ratings

January 2006 to January 2009
0.75

0.60

Rating Notches 0.45

0.30

0.15

0.00
May-06

May-07

May-08
Nov-06

Nov-07

Nov-08
Mar-06

Mar-07

Mar-08
Jul-06

Jul-07

Jul-08
Sep-06

Sep-07

Sep-08
Jan-06

Jan-07

Jan-08

Jan-09
Fig. 6. Coefficient of variation of market-implied bond ratings. Source: Moody’s Market Implied Ratings.

more stable over time than are lower ratings. The group of banks variability in their Libor quotes during the same period. Finally,
participating in the Libor is composed of highly rated banks; their we should also notice that these ratings cannot explain the dras-
long term debt ratings are all between A and Aaa, and similarly tic changes in Libor quotes after August 9, 2007. Fig. 6 shows
their short term deposit ratings are all P1 during the relevant time that, on average, the coefficient of variation slightly increases
period. Hence, credit ratings by themselves cannot explain varia- from before to after August 9, 2007, but such a change is not
tion (or the absence of variation) in the daily Libor rate, since credit sufficient to explain the drastic increase in dispersion in banks’
ratings are highly stable by design while the stability of the Libor Libor quotes during that time period.
varies across different periods. Thus, the null hypothesis of H3 is rejected. Although the Libor
Instead we study the pattern in market-implied ratings as pro- quote and spread patterns detected in this section cannot establish
vided by the ratings agency Moody’s. These market-implied ratings the presence of a conspiracy or a manipulation of the Libor rate,
transform market indicators such as bond prices into a scale that is certain patterns do ‘‘flag’’ such a possibility.
comparable to credit ratings. Market-implied ratings typically
change on a daily basis with the market, and though on average
7. Key results, conclusions, and implications
they are expected to be equal to credit ratings, they are more
responsive to market conditions at a very high frequency. From
The analyses presented in this study screen for markers that are
an overly-simplified perspective, if Moody’s credit ratings are seen
associated with the presence of conspiracies and manipulations in
by the market as ‘‘correct,’’ market-implied ratings will be close to
various industries. Such markers may indeed exist in the absence
these ratings. But when the market perceives the actual ratings as
of anticompetitive behavior. Conversely, collusions and/or manip-
incorrect, statistically significant differences will be observed
ulations may be present without triggering such markers. Although
between the actual ratings and market-implied ratings. Hence,
this study does not intend to provide conclusive evidence of the
comparisons between actual and implied ratings help credit pro-
presence of anticompetitive market behavior (or, for that matter,
fessionals anticipate ratings changes, identify default candidates,
of a material manipulation of Libor) by the participating banks,
detect relative value trading opportunities, and are therefore a ma-
we do present statistical evidence of patterns that appear to be
jor indicator of how the market perceives the underlying issuers in
inconsistent with those expected to occur under conditions of mar-
terms of risk. On average, market implied ratings and actual ratings
ket competition for certain periods under study.
are not statistically different from each other.
The experimental analyses that we conduct to assess Hypothe-
If there is no variability in (relative) credit risk across the partic-
sis H1 are designed to detect evidence of a material manipulation
ipating banks, we should expect the coefficient of variation for the
of the Libor level in a downwards direction during Period 2 by
market-implied ratings across this group to be approximately zero,
comparing Libor to its predicted level, where that prediction is
because their market-implied ratings would be identical. What we
based on benchmark data. We find that the actual Libor is not sta-
find when we look into Fig. 6 is that Moody’s bond-implied ratings
tistically different from its predicted values in Periods 1, 2 or 3. In
for these banks present variability.24
other words, the empirical evidence is not consistent with the
Given this, we would not expect to observe the banks’ Libor
hypothesis that the Libor was materially manipulated downward
quotes to be completely identical on a daily basis such as in Per-
during Period 2, as the Wall Street Journal alleges.
iod 1, though it would be fair to expect these quotes to be close
The analyses that we conduct to assess Hypothesis H2 are de-
to each other since the variability in bond-implied ratings is not
signed to detect evidence of a conspiracy and manipulation by
very great. Additionally, the coefficient of variation of intraday
searching for quotes that cluster together in non-random patterns.
implied ratings is increasing from January through August
Based on our analyses, it appears that the individual quotes are
2007, meaning that the differences in risk across the participat-
very tightly clustered in Period 1 relative to the later periods. Re-
ing banks are widening, which is not reflected in an increase in
sults for Period 1 would be more consistent with a possible con-
spiracy to manipulate the Libor rate than in Period 2. Thus,
24
All available individual banks’ implied ratings are averaged out monthly; the although we are unable to reject the null Hypothesis H1, we reject
intra-month standard deviations are also computed. the null Hypothesis H2.
150 R.M. Abrantes-Metz et al. / Journal of Banking & Finance 36 (2012) 136–150
To assess Hypothesis H3, we explore whether banks with rela-
tively low (high) CDS spreads are also banks with relatively high
(low) Libor quotes. Such a negative correlation between a bank’s Li-
bor quote and its CDS spread might suggest an inconsistency be-
tween the actual borrowing costs of banks and their perceived
conditions of solvency and financial strength. Based on our analyses,
we find the existence of several noteworthy outliers, meaning banks
whose ordinal positions in Libor quotes may be unrelated to their
ordinal positions in CDS spreads. Although the Libor quote and
spread patterns cannot establish the presence of manipulation, we
identify certain patterns in this study that do flag that possibility.
Interestingly, many of the markers that we review in this study
are, on a contemporaneous basis, readily available for review by
market analysts. CDS spreads begin to increase several months
prior to Period 2, and yet individual Libor quotes remain un-
changed. Many of the banks’ quotes actually decrease while
spreads on a wide variety of instruments increase. Finally, when
allegations of potential manipulation are published on April 17,
2008, these patterns shift again.
Better proxies of short-term borrowing costs may help explain
some of the statistical behavior that we document in this study.
For instance, commercial paper rates may prove to be more effec-
tive Libor predictors than are CDS spreads. Stress measures (e.g.,
VaR or value-at-risk), net borrowing or lending positions, and other
observable characteristics may emerge to provide superior expla-
nations for the observed Libor quotes and CDS spreads. In addition,
event studies may identify other structural breaks in the sample
period. There may be plausible explanations for the presence of
markers in competitive markets. Future researchers may choose
to explore such explanations for these anomalies.
Acknowledgements
The authors gratefully acknowledge the suggestions of Mukesh
Bajaj, John Cochrane, John Connor, Guy Erb, George Judge, Cathy
Niden, Sofia Villas-Boas, and the assistance of Marissa Rich, Shelly
Yang, and especially Susan Press. We also thank participants at the
Microeconomics Lunch Seminar in Economics at Leonard Stern
School of Business, New York University, for suggestions. The views
expressed in this study belong solely to the authors and should not
be attributed to the organizations with whom they are affiliated or
their clients.
References
Abrantes-Metz, R., 2010. The power of screens to trigger investigations. Securities
Litigation Report 10, 17–22.
Abrantes-Metz, R., Addanki, S., 2007. Is the Market Being Fooled? An Error-Based
Screen for Manipulation. Working Paper. <http://www.papers.ssrn.com/sol3/
cf_dev/AbsByAuth.cfm?per_id=339863>.
Abrantes-Metz, R., Bajari, P., 2010. Screens for conspiracies and their multiple
applications. Competition Policy International 6, 129–144.
Abrantes-Metz, R., Froeb, L., 2008. Competition Authorities are Screening for
Conspiracies: What are They Likely to Find? The American Bar Association
Section of Antitrust Law Economics Committee Newsletter, March 2008, pp.
10–16.
Abrantes-Metz, R., Froeb, L., Geweke, J., Taylor, C., 2006. A variance
screen for collusion. International Journal of Industrial Organization 24, 467–
486.
Abrantes-Metz, R., Villas-Boas, S., Judge, G., 2011. Tracking the Libor rate. Applied
Economics Letters 18, 1–7.
Ahn, S., Choi, W., 2009. The role of bank monitoring in corporate governance:
evidence from borrowers’ earnings management behavior. Journal of Banking
and Finance 33, 425–434.
Ashton, J.K., Hudson, R.S., 2008. Interest rate clustering in UK financial services
markets. Journal of Banking and Finance 32, 1393–1403.
American Bar Association, 2010. Proof of Conspiracy under Antitrust Federal Laws.
American Bar Association, Chicago, USA.
Bajari, P., Ye, L., 2003. Deciding between competition and collusion. The Review of
Economics and Statistics 85, 971–989.
Benford, F., 1938. The law of anomalous numbers. Proceedings of the American
Philosophical Society 78, 551–572.
British Bankers’ Association, 2008. BBA Libor – Frequently asked
Questions, June 7. <http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=225&a=
1416>.
Cummings, C., 1999. London banks’ Euro-Libor rate fixing appears to be losing to
rival Euribor. Wall Street Journal (February 10), 1.
Esposito, F., Ferrero, M., 2006. Variance Screens for Detecting Collusion: An
Application to Two Cartel Cases in Italy. Working Paper, Italian Competition
Authority.
Ewerhart, C., Cassola, N., Ejerskov, S., Valla, N., 2007. Manipulation in money
markets. International Journal of Central Banking 3, 113–148.
Fridson, M.S., Garman, M.C., 1998. Determinants of spreads on new high-yield
bonds. Financial Analysts Journal 54, 28–38.
Gorton, G., 1996. Reputation formation in early bank note markets. Journal of
Political Economy 104, 346–397.
Gyntelberg, J., Wooldridge, P., 2008. Interbank rate fixings during the recent
turmoil. BIS Quarterly Review (March), 59–72.
Harrington, J., 2006. Behavioral screening and the detection of cartels. In: Claus-
Dieter, E., Atanasiu, I. (Eds.), European Competition Law Annual 2006:
Enforcement of Prohibition of Cartels. Hart Publishing, Oxford, UK.
Harrington, J., 2008. Detecting cartels. In: Buccirossi, P. (Ed.), Handbook in Antitrust
Economics. MIT Press, Cambridge, USA.
Judge, G., Schechter, L., 2009. Detecting problems in survey data using Benford’s
law. Journal of Human Resources 44, 1–24.
Konrad, R., Sandoval, G., 2002. Orbitz Rivals Cry Foul, Claim Monopoly in Air Travel.
CNET News.com, April 11, 2002. <http://www.news.cnet.com/2009-1017-
879314.html>.
Livingston, M., Miller, R.E., 2000. Investment bank reputation and the underwriting
of nonconvertible debt. Financial Management 29, 21–34.
Mackenzie, M., 2008. Libor bankers brush off calls to reform way key rate is
calculated. Financial Times (May 31), 1.
Mackenzie, M., Tett, G., 2008. Libor remarks fail to put unease to rest. Financial
Times (June 2), 16.
Mollenkamp, C., Norman, L., 2008. British bankers group steps up review of widely
used Libor. Wall Street Journal (April 17), C7.
Mollenkamp, C., Whitehouse, M., 2008. Study casts doubt on key rate; WSJ analysis
suggests banks may have reported flawed interest data for Libor. Wall Street
Journal (May 29), A1.
Narayanan, R.P., Rangan, K.P., Rangan, N.K., 2007. The effect of private-debt
underwriting reputation on bank public-debt underwriting. Review of
Financial Studies 20, 597–618.
Newcomb, S., 1881. Note on the frequency of use of the different digits in natural
numbers. American Journal of Mathematics 4, 39–40.
Nigrini, J., 2005. An assessment of the change in the incidence of earnings
management around the Enron–Andersen episode. Review of Accounting and
Finance 4, 92–110.
Pirrong, C., 2004. Detecting manipulation in futures markets: the Ferruzi soybean
episode. American Law and Economics Review 6, 28–71.
Porter, R., Zona, J.D., 1997. Ohio School Milk Markets: An Analysis of Bidding. NBER
Working Paper No. 6037.
Porter, R., Zona, J.D., 1999. Ohio school milk markets: an analysis of bidding. The
RAND Journal of Economics 30, 263–288.
Russo, T., 1983–1993. Regulation of the Commodities Futures and Options Markets.
Shepard’s/McGraw-Hill, Colorado Springs, USA.