The LIBOR eclipse: political economy of a benchmark

Up until around 2008 and the subsequent revelation of systematic manipulation, the integrity and ‘facticity’ of the London Interbank Offered Rate (LIBOR) were rarely questioned. Academics treated the LIBOR and the Eurodollar market as if they were synonyms. Central bankers conducted monetary policy as if the LIBOR was an objective reflection of the money market rate. Corporates and households entered into LIBOR-indexed financial contacts as if a money market was the underlying benchmark. This paper investigates how and why the LIBOR managed to maintain its status as a term for the competitive money market colloquially, professionally and in the economic literature for so long. By adopting a theoretical framework drawn from both Political Economy and Sociology, and applying it to the LIBOR-indexed derivatives market, it is shown how the benchmark’s appearance betrays its fundamental nature. This process benefits certain actors within the market: the banks. Importantly, however, it also reveals how the LIBOR became, and remained, such an important benchmark and how it came to be perceived as an ‘objective fact’.