Miss Libor

In July 2011 Risk Magazine reported that some market operators believe that in 2007 and 2008 Libor rates underestimated the real cost of funding of banks since “some banks were putting in artificially low rates” (Wood, 2011). This is currently the focus of some lawsuits and investigations. This allegation means that rates lower than their actual funding costs were communicated to the Libor calculation committee by some Libor contributors. The Libor contributors are those major banks which are selected by the Libor committee for the panel providing the quotes used to compute Libor. In this short note, we try to analyse the situation with no prejudice and some quantitative foundation, taking a point of view different from most previous comments.