International Review of Financial Analysis 42 (2015) 270–277

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International Review of Financial Analysis

Modelling the lowballing of the LIBOR fixing☆

Russell Poskitt a,⁎,1, Wajira Dassanayake b
a
University of Auckland, New Zealand
b
Unitec Institute of Technology, New Zealand

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

Article history: We test the lowballing of submissions to the three-month US dollar LIBOR fixing by panel members using a
Received 11 March 2015 simple two-equation model. We find evidence in the quote behaviour of a handful of banks during a period of
Received in revised form 10 July 2015 extreme stress in interbank markets that the submission of high quotes is associated with stock price declines
Accepted 4 August 2015
and that stock price declines encourage the submission of low quotes the following day. Two of these banks –
Available online 13 August 2015
Barclays and UBS – have admitted to regulators that they had engaged in lowballing US dollar LIBOR submissions
JEL classification:
during the financial crisis. However, when allied to the filtering process applied to LIBOR fixings, the absence of
F30 widespread lowballing among panel banks suggests that any such lowballing did not impart significant down-
G12 ward bias to three-month US dollar LIBOR.
G15 © 2015 Elsevier Inc. All rights reserved.

Keywords:
LIBOR fixing
Interbank market
Lowballing
Financial crisis

1. Introduction
This paper tests a simple model of lowballing in quote submissions
of banks on the US dollar LIBOR panel. While six panel banks have so
far admitted to regulatory authorities that their US dollar LIBOR submis-
sions were often manipulated to suit their positions in interest rate
derivatives, only two banks, Barclays and UBS, have admitted to submit-
ting artificially low quotes, or lowballing, to prevent market participants
from making unfavourable inferences about either the bank’s liquidity
position or its creditworthiness.
Our study is important for several reasons. First, prior studies of the
US dollar LIBOR fixing have not found conclusive evidence of lowballing
in their statistical analyses. Second, much of this prior research has
tended to focus on the level of US dollar LIBOR rather than on the
quote submission behavior of individual panel banks. And where it
has utilised data on submission by panel banks, the analysis has been
quite limited. Third, it is important to ascertain whether lowballing
was restricted to just two banks or was it more widespread. Lowballing
by only a handful of banks is unlikely to have had any impact on the
level of LIBOR because of the filtering that takes place. On the other
☆ The authors thank the Securities Industry Research Centre of Asia-Pacific (SIRCA) for
the provision of data used in this paper.
⁎ Corresponding author.
E-mail address: r.poskitt@auckland.ac.nz (R. Poskitt).
1
(retired).
hand, more widespread lowballing would likely have led to a significant
downward bias to the LIBOR fixing and lent credence to claims that the
three-month US dollar LIBOR fixing was up to 30 – 40 basis points below
its true level.
We model the lowballing hypothesis using two equations. Our first
equation models the stock return on a bank as a function of market
returns and the ranking of a bank’s quote submission to the LIBOR
fixing. The intuition is that a high quote (i.e. low ranking score) will sig-
nal that the bank is having difficulty raising funds and trigger a stock
price decline. The second equation models the ranking of a bank’s
quote submission as a function of the ranking of its quote submission
on the previous day and its stock return on the previous day. The intui-
tion is that a stock price decline will encourage a bank to submit a low
quote to the LIBOR fixing to reassure market participants of its financial
soundness.
We collect data on quote submissions to the US dollar LIBOR fixing
and returns on bank stocks and market indices between July 2005 and
August 2008. We define a period of financial stress in financial
markets that commenced in mid-March 2008 following the collapse of
Bear Stearns and ran to mid-April 2008. Estimation results for our first
equation show that during this period of extreme stress in the interbank
market, the stock returns of four banks were significantly negatively
related to the submission of high quotes to the LIBOR fixing. The four
banks were Barclays, Lloyds, Royal Bank of Canada and UBS. This
suggests that these banks had strong incentives to lowball their quote
submissions to the LIBOR fixing. The estimation results for our second

http://dx.doi.org/10.1016/j.irfa.2015.08.003
1057-5219/© 2015 Elsevier Inc. All rights reserved.
 R. Poskitt, W. Dassanayake / International Review of Financial Analysis 42 (2015) 270–277
equation show that during this period of extreme stress the positioning
of a bank’s LIBOR submission was highly sensitive to the previous day’s
stock return for four banks – Barclays, Royal Bank of Canada, RBS and
UBS. The behaviour of these banks is consistent with submitting
artificially low quotes to influence market perceptions of the financial
condition of the bank. In summary, our model had some success in iden-
tifying the two banks, Barclays and UBS, that had admitted lowballing
their submissions to the US dollar LIBOR fixing. Aside from identifying
which banks had an incentive to engage in lowballing and which
banks were acting in a manner consistent with lowballing, our results
show that only a handful of banks were behaving is a manner predicted
by the lowballing hypothesis. Given that the top and bottom quartile of
quote submissions are excluded from the calculation of the LIBOR fixing,
our analysis suggests that such behaviour is unlikely to have imparted
much of a downward bias to US dollar LIBOR. When we dated the
start of the period of financial stress to early August 2007, we find
almost no evidence in support of our modelling of the lowballing
hypothesis. One possible explanation for this result is that interbank
markets did not become heavily stressed until Bear Stearns failed in
mid-March 2008, and that the concerns that drove behaviour consistent
with lowballing had not reached critical levels until this seminal event
occurred.
The remainder of the paper is structured as follows. Section 2
reviews the workings of the LIBOR mechanism and discusses the
recent controversy over the LIBOR fixing. Section 3 reviews the limited
literature on lowballing. Section 4 outlines the methodology and data
employed to test for the presence of behaviour consistent with the
lowballing hypothesis. Section 5 presents and discusses the empirical
results. Section 6 concludes.
2. The LIBOR fixing
2.1. The mechanics of LIBOR
The British Bankers’ Association (BBA) introduced the LIBOR fixing
in 1985 in response to the demand for a daily benchmark interbank
borrowing rate.2 LIBOR has since become the primary floating-rate
benchmark in the eurocurrency markets. By 2008 the BBA had contrib-
utor panels for interbank funding costs in ten eurocurrencies, including
the four major global eurocurrencies of the US dollar, yen, euro, and
sterling. For each eurocurrency the BBA designated a panel of contribu-
tor banks, varying in size from eight banks for the minor eurocurrencies
to 16 banks for the four major eurocurrencies. The BBA selected contrib-
utor banks according to a number of factors, including reputation, scale
of activity in the London market, perceived expertise in the currency
concerned, and credit standing (BBA, 2008a).
During the period examined in this study, the daily LIBOR fixings
worked as follows. Each business day between 11.00 and 11.10 am
London time, panel members would submit to the BBA a rate for each
of 15 maturities ranging from overnight to 12 months that best repre-
sented the cost the bank faces in borrowing unsecured funds in the
interbank market for that term.3 In the words of the BBA, each rate
represented the rate at which “the bank could borrow funds, were it
to do so by asking for and then accepting interbank offers in reasonable
size” (BBA, 2008a). For each maturity, the top and bottom quartiles
were removed, and the mean would then be calculated from the
remaining quotes. This trimmed mean, denoted the BBA LIBOR Fixing
(or LIBOR for short), was then released to information providers along
with the quotes submitted from individual panel members at around
2
LIBOR serves as a benchmark for a range of financial contracts from syndicated loans
to interest rate futures, options, and swap contracts. The BBA estimated that interest rate
swaps with a notional value of US$350 trillion and loans with a face value of US$10 trillion
are indexed to LIBOR (BBA, 2008a).
3
In practice quotes were submitted to Reuters who compiled and distributed the LIBOR
fixing on behalf of the BBA.
271
11.30 am London time. For all practical purposes, the LIBOR fixing was
deemed to represent the rate at which large banks lent to each other
in the London interbank market.
Traditionally, market participants had confidence in the integrity of
LIBOR. The fixing was deemed to be representative of market conditions
as it came from a highly liquid market, the London market for interbank
eurocurrency funds. The risk of manipulation was thought to be minor
given that the majority of the LIBOR panels comprised between 12
and 16 banks. Furthermore the BBA used a trimmed mean to ensure
that unusually high or low quotes submitted by one or two banks
would have no impact on the LIBOR fixing. Lastly, the BBA incentivized
each bank to submit accurate quotes by publishing the individual
quotes submitted by each panel member. Although contributor banks
were not obliged to transact at submitted quotes, it was thought that
panel banks would be reluctant to incur the reputational costs associat-
ed with transacting at markedly different rates in private bilateral
transactions.
2.2. The controversy surrounding the LIBOR fixing
On 16 April 2008, the Wall Street Journal published a front-page story
in its European edition that suggested that the turmoil in global finan-
cial markets had led panel banks to deliberately submit artificially low
rates to the daily US dollar LIBOR fixing to avoid the stigma that came
with submitting higher rates (Mollenkamp, 2008). According to the
‘lowballing’ hypothesis, as interbank liquidity dried up, banks were
not only forced to rely more on guesswork in submitting quotes to the
LIBOR fixing, but they were particularly keen to avoid submitting quotes
that were higher than those submitted by other panel members, since
high quotes might be interpreted as a signal about the bank’s liquidity
position or creditworthiness. The net effect of this behaviour was to
put downward pressure on the LIBOR fixing. One estimate put the
downward bias in three-month US dollar LIBOR at 30 basis points
(Mollenkamp, 2008). Other commentators suggested that the incentive
to submit artificially low quotes would be removed if the BBA were to
abandon the historically transparent rate-setting process and make
the quotes of individual panel members anonymous, or else change
the definition of the funding rate (Finch & Livesey, 2008; Trincal,
2008; Van Kan, 2008).4
Evidence that US dollar LIBOR was unduly low during early
2008 came from several sources. Anecdotally, a number of bankers
complained that they could not raise funding at the published LIBOR
fixing (Van Kan, 2008). Commentators also observed that US dollar
LIBOR was below US dollar funding rates implied by FX swaps for
much of the period since August 2007 (Rozens, 2008).5 At the end of
May 2008 the Wall Street Journal published an analysis showing that in-
dividual panel bank funding costs implied by credit default swap (CDS)
prices were above quotes submitted by individual panel members to the
LIBOR fixing (Mollenkamp & Whitehouse, 2008).
The BBA was quick to defend the integrity of the LIBOR fixing. On the
same day as the Wall Street Journal article appeared, the BBA announced
it would advance its annual review of the contributor panels, with
4
Some of this criticism of LIBOR emanated from the US where it was felt that the stub-
born refusal of US dollar LIBOR to decline in step with short-term US benchmark rates such
as the federal funds rate made the US dollar LIBOR fixing a poor proxy for domestic US dol-
lar funding costs. Most of the discussion focused on the fact that only three of the 16 panel
members were US-based banks —Bank of America, Citigroup, and JP Morgan Chase. The
European and Asian banks on the US dollar LIBOR panel did not have full access to the
emergency liquidity programs recently introduced by the Federal Reserve, including direct
access for broker-dealers to the discount window lending rate (Trincal, 2008).
5
While Baba, Packer, and Nagano (2008) acknowledge that misstatement of US dollar
LIBOR by panel members could help explain the divergence between US dollar LIBOR
and the FX swap-implied dollar rate, they also note that this divergence could be attribut-
able to a combination of factors, including impaired liquidity in the money and foreign ex-
change markets (as evidenced by wider bid/ask spreads) and one-sided order flow in the
markets for funding currencies such as sterling that places upward pressure on funding
currency borrowing rates.
272 R. Poskitt, W. Dassanayake / International Review of Financial Analysis 42 (2015) 270–277
particular focus on three-month US dollar LIBOR, with the implied
threat that it would eject banks from any panel if they were found to
be submitting false quotes. Three-month US dollar LIBOR began to rise
immediately and was nearly 20 basis points higher within two days.
The BBA was also keen to refute the complaints about the level of US
dollar LIBOR fixing. In a consultative paper on LIBOR released in early
June 2008, the BBA reiterated its claim that the US dollar LIBOR fixings
accurately reflected conditions in interbank markets, refuting in detail
some of the arguments financial commentators had offered in support
of their claim that US dollar LIBOR was artificially low. It pointed out
that LIBOR represented the average cost that panel members faced in
obtaining funds in the interbank market, and in the absence of the
high credit rating held by panel members, non-panel members would
likely pay a premium to LIBOR for funding or might simply be unable
to raise funding at all in an environment where liquidity had all but
dried up (BBA, 2008a). The BBA also suggested that factors such as
illiquidity and creditworthiness could prevent market participants
from taking advantage of most of the arbitrage opportunity provided
by the FX swap market. For example, many banks were short of US dol-
lar funding at the time and were not prepared to lend US dollars (BBA,
2008a). In response to the Wall Street Journal’s analysis using CDS
data, the BBA argued that the CDS market was itself in a state of flux.
In a Feedback Statement released in early August 2008, the BBA
announced that as a result of the ‘consultation process’, it would not
be making any changes to the mechanics of the LIBOR fixing (BBA,
2008b).
While the BBA might well have thought that market confidence in
LIBOR had survived this unprecedented scrutiny, by 2009 regulatory
authorities had begun to take an interest in the submission behaviour
of panel members. The regulators investigated a number of banks for
alleged ‘misconduct’ relating to the fixing of LIBOR and other bench-
marks such as EURIBOR (Euro Interbank Offered Rate) and TIBOR
(Tokyo Interbank Offered Rate). These investigations were led by the
Financial Services Authority (FSA) in the UK and the Commodity Futures
Trading Commission (CFTC) in the US, although regulatory authorities
in the European Union, Switzerland, Canada and Japan were also
involved.
One of the first banks to be investigated was Barclays. Internal email
communications and staff interviews revealed that LIBOR submitters
had been requested by the interest rate derivative desk to raise or
lower their LIBOR and EURIBOR submissions to suit their trading posi-
tions and that senior management had sought to influence LIBOR
submissions to counter negative media comment during times of
market stress.6 It was also clear that LIBOR and EURIBOR submitters
had also sought to influence the submissions of other panel members.
In June 2012, Barclays was fined £59.5 million by the FSA and $360
million by the CFTC and the US Department of Justice (FSA, 2012a).
An investigation of UBS revealed similar practices, although the reg-
ulators felt that UBS’s breach of market codes was more egregious. In
December 2012, UBS was fined £160 million by the FSA, $1,200 million
by the CFTC and US Department of Justice and SwFr 60 million by the
Swiss Financial Market Supervisory Authority (FSA, 2012b). Similar
investigations were conducted at other LIBOR panel banks. These inves-
tigations found that LIBOR submitters at RBS had manipulated their
LIBOR submissions to suit the trading book of the interest rate deriva-
tives desk and sought to collude with other banks over their LIBOR sub-
missions. The investigators found no evidence of lowballing. The FSA
fined RBS £87.5 million in February 2013 (FSA, 2013a). The investiga-
tion at Rabobank found that LIBOR and EURIBOR submitters had manip-
ulated their submissions to suit the trading book of the interest rate
derivatives desk and sought to collude with other banks over their
6
For example, in a telephone call on 19 March 2008 at a time of extreme illiquidity in
the interbank market, one Barclay’s LIBOR submitter was told to ‘just set it where everyone
else sets it, we do not want to be standing out’ (FSA, 2012a, 27).
submissions. Rabobank was fined £105 million by the FCA in October
2013 (FCA, 2013).
In December 2013, the European Commission announced fines for
eight international banks, five of whom were members of the US dollar
LIBOR panel, for colluding in the fixing of Yen LIBOR. Of the five US dollar
panel banks, UBS received full immunity for its co-operation in the in-
vestigation while Citigroup received partial immunity. Citigroup was
fined €70 million, RBS €260 million, Deutsche Bank €259 million and
JP Morgan Chase €80 million (European Commission, 2013). In July
2014, the seventh joint penalty was handed out by US and UK regulators
to Lloyds, for manipulating LIBOR.7 Lloyds was fined £105 million by the
Financial Conduct Authority (FCA) – the successor to the FSA – and $191
million by the CFTC and US Department of Justice (FCA, 2014).8
Of the banks investigated, only Barclays and UBS admitted to
lowballing LIBOR submissions during our sample period. It is somewhat
ironic that Barclays should be castigated and fined for this as it was one
of the first banks to confirm to the FSA in March 2008 that many panel
members were making unduly low US dollar LIBOR submissions; “What
is everybody … including ourselves … going to do? Keep their heads
below the parapet and not stick out’ (FSA, 2013b, 36). The same manag-
er at Barclays would also complain to the FSA that Barclays had been
‘picked upon for posting LIBOR above everybody else’ in 2007 (FSA,
2013b, 36). The CEO of Barclays, Robert Diamond, would later claim
before a UK Parliamentary Treasury Select Committee that lowballing
had been implicitly sanctioned by senior Bank of England officials
keen not to precipitate a run on any major bank in the wholesale market
in October 2008.9 This was refuted by the Bank of England and the sub-
sequent controversy led to the resignation of Diamond.10
3. Prior Literature
Several papers have examined the US dollar LIBOR fixing for
evidence of the ‘under-reporting’ of US dollar LIBOR (Abrantes-Metz,
Kraten, Metz, & Seow, 2012; Monticini & Thornton, 2013). Abrantes-
Metz et al. (2012) examined data on both the US dollar LIBOR fix and
quote submissions by US dollar LIBOR panel banks for evidence consis-
tent with manipulation of the LIBOR fixing. At the aggregate level, the
authors examined the spread between US dollar LIBOR and the federal
funds effective rate for evidence consistent with underreporting or
lowballing of LIBOR submissions. Specifically, they used historical data
from the pre-2007 period to estimate the historical relationship be-
tween the two rates and then used the federal funds effective rate for
the period from January 2007 to May 2008 to predict three-month US
dollar LIBOR over this period. They found that no significant difference
between actual LIBOR and predicted LIBOR and authors concluded
that this was not consistent with under-reporting of three-month US
dollar LIBOR. The authors also subjected the actual quotes submitted
by panel banks to a variety of statistical analyses. One of their more rel-
evant findings was that quote submissions were less highly clustered
between January 2007 and May 2008 than in the pre-2007 period, sug-
gesting that there is less evidence of possible collusion or manipulation
after the onset of the financial crisis.
Monticini and Thornton (2013) tested for evidence consistent with
lowballing by examining the spread between US dollar LIBOR and
rates on large certificates of deposit (CDs). The authors found four statis-
tically significant structural beaks in the three-month US dollar LIBOR –
7
HBOS, by now one of Lloyd’s subsidiaries after a ‘merger’ in January 2009, also admit-
ted lowballing submissions to the sterling and US dollar LIBOR fixings on two occasions
during September and October 2008 as a result of management directives. However these
instances fall outside our sample period which ends in August 2008 (FCA, 2014).
8
The FCA said that £70 million of the FCA fine was for attempting to manipulate fees
payable to the Bank of England under the bank’s participation in the Bank of England’s spe-
cial liquidity scheme (SLS) which was introduced to support UK banks during the financial
crisis (FCA, 2014).
9
Matt Scuffham, ‘Barclay’s Diamond faces grilling in Parliament’, Reuters, 3 July 2012.
10
‘Libor scandal: Paul Tucker denies ‘leaning on’ Barclays’, BBC News, 9 July 2012.
 R. Poskitt, W. Dassanayake / International Review of Financial Analysis 42 (2015) 270–277
CD spread over the period from January 2004 to December 2010: a -13.0
basis point break in mid-June 2005, a -4.3 basis point break in early
July 2007, a + 13.9 basis point break in December 2008 and a -10.5
basis point break in mid-December 2009. The authors regarded the
cumulative break in the spread of -5.6 basis points that had occurred
by mid-2007 as evidence of underreporting of LIBOR. The fact that the
decline in the spread occurred before the onset of the financial crisis
in August 2007 was attributed to banks being aware of problems with
mortgage-backed securities before then.
This brief survey of the prior literature highlights a number of prob-
lems. First, studies that have examined the behaviour of money market
spreads have yielded conflicting results. Using the federal funds
effective rate as the benchmark, Abrantes-Metz et al. (2012) find no ev-
idence of under-reporting of US dollar LIBOR but Monticini and
Thornton (2013) obtain the opposite results using CDs as the bench-
mark. Perhaps more importantly, both studies have ignored the reality
that many traditional spread relationships were severely impact by
the financial crisis, making it extremely difficult to isolate the precise
contribution made by any deliberate lowballing behavior on the part
of panel banks. Second, prior studies such as Abrantes-Metz et al.
(2012) which have employed data on quote submissions of individual
panel banks have subjected this data to a limited range of statistical
analyses, including the calculation of the daily standard deviation across
submissions and pairwise participation rates for panel banks.11 We
suggest that this type of analysis offers little prospect of shedding light
on the lowballing phenomenon since this phenomenon has a dynamic
element to it. Third, much of the prior research was conducted before
the results of the investigations by the various regulatory authorities
were known. A valid test of any model of lowballing behaviour would
be that it can distinguish between those banks that did engage in
lowballing the US dollar LIBOR fixing and those that did not engage in
such practices. Moreover, identifying the number of banks who engaged
in lowballing behavior is important to understanding the likely conse-
quences of such behavior. Lowballing of quote submissions by just a
handful of panel banks is unlikely to have materially affected the level
of the US dollar LIBOR fix owing to the trimming process conducted
during the calculation of the LIBOR fix.
4. Methodology, Sample and Data
4.1. Methodology
The lowballing hypothesis is based on the twin notions that
(i) participants in the interbank market are highly sensitive to informa-
tion concerning the financial soundness of potential counterparties,
particularly during times of financial stress, and (ii) this sensitivity
encourages banks on LIBOR panels to understate the costs of funds
they face in an attempt to influence market perceptions of their financial
soundness.
In respect of the interbank market, the extant literature recognises
that the existence of such a market allows banks to access large volumes
of short-term funds to manage liquidity shocks, thus avoiding the need
to liquidate long-term assets (Bhattacharya & Gale, 1987). However one
of the notable features of the financial crisis during 2008 has been the
inability of banks to rollover short-term funding in wholesale markets
(Brunnermeier, 2009; Shin, 2009). One of the risks that banks face in
tapping this market is that suppliers of funds may withdraw funding
based on noisy signals of bank solvency (Huang & Ratnovski, 2008).
One of the problems confronting wholesale market participants during
the financial crisis was the uncertainty over which banks, and potential
counterparties to interbank transactions, had large holdings of increas-
ingly valueless mortgage-backed securities. In this environment, a high
LIBOR submission risked being interpreted as a signal that the bank in
11
‘Participation’ means surviving the daily trimming process and contributing to the cal-
culation of the daily LIBOR fixing.
273
question has trouble funding itself because other market participants
had come to the conclusion that it had a large amount of troubled assets
on its balance sheet. Any such perception would be quickly reflected in
the panel member’s stock price. This is exacerbated by the widespread
use of structural models of default by market practitioners in which
falling stock prices or increased stock price volatility are seen as a signal
of increased probability of default.
We model this first leg of the lowballing hypothesis as follows:
R j;t ¼ β0 þ β1 Rm;t þ β2 LOSPDt þ β3 RANK j;t þ β4 DUM þ β5 DUM  RANK j;t þ ut
ð1Þ
where Rj,t is the return on the stock of bank j on day t, Rm,t is the return
on the market index on day t, LOSPDt is the change in the LIBOR-OIS
spread on day t, RANKi,t is the ranking of the quote submitted by bank
j on day t12, DUM is a dummy variable that takes the value of 1 during
period of financial stress and 0 otherwise, and ut is a random error term.
Our period of financial stress is dated from 17 March 2008 to 16 April
2008. This covers the period between the collapse of Bear Stearns in
mid-March 2008 and the BBA’s warning to panel members on quote
submissions to the LIBOR fixing. The collapse of Bear Stearns in March
2008 is generally considered to have precipitated a period of extreme
stress in interbank markets (FSA, 2013b). Our robustness analysis uses
a longer period of financial stress commencing with onset of the global
financial crisis on 9 August 2007 and ending on 16 April 2008.13
We use Rm,t to control for changes in stock market sentiment on the
stock return of individual banks. We augment this basic index model
structure with LOSPD to control for the effect of contemporaneous
changes in interbank market stress on the bank stock returns. The
LIBOR-OIS spread is regarded as a good proxy measure of stress in inter-
bank markets (Thornton, 2009). We expect β2 to be negative as an
increase in interbank market stress is likely to unsettle investors and
depress bank stock prices.
During normal market conditions when there is no stress in funding
markets and few concerns about the creditworthiness of panel mem-
bers, we do not expect there to be any relationship between the returns
on a bank’s stock and the ranking of the bank’s LIBOR submission
i.e., OLS estimates of β3 are not expected to be significantly different
from zero. However, during periods of market stress, when there is
uncertainty about the creditworthiness of panel members, we expect
higher LIBOR submissions (a quote with a smaller RANK score) to be
interpreted as a sign that the bank is having trouble raising funds in
the wholesale market and for the increased likelihood of default to be
reflected in stock price decreases i.e., OLS estimates of β5 will be signif-
icantly greater than zero. Thus the first leg of the lowballing hypothesis
predicts that:
H1A. β5 N 0
and
H1B. β3 + β5 N 0
The second leg to the lowballing hypothesis is the submission of
a “false” quote to avoid the unfavourable market comment and
repercussions in funding markets that would follow from the submis-
sion of a high quote. The literature on aggressive accounting practices
(or misreporting), particularly where firms are motivated by concerns
over the cost and availability of external financing (e.g., Dechow,
12
The highest quote submitted to the LIBOR fixing has a RANK score of 1, the second
highest a RANK score of 2 and so. In the absence of ties, the lowest quote submitted will
have a RANK score of 16.
13
Although many market participants had realised the valuation of subprime mortgage-
based structured finance products was a looming problem by early 2007, we use August 9
to date the onset of the global financial crisis. On this date BNP Paribas froze redemptions
for three investment funds, citing its inability to value structured finance products. Follow-
ing this event, money market participants became reluctant to lend to each other
(Brunnermeier, 2009, p84).
274 R. Poskitt, W. Dassanayake / International Review of Financial Analysis 42 (2015) 270–277

Sloan, & Sweeny, 1996), provides a useful starting point. Based on the Table 1
insights from this literature, we conjecture that a LIBOR panel bank Descriptive statistics for RANK variable. Table 1 reports descriptive statistics for the RANK
variable. RANKj,t is the ranking of the quote submitted by bank j on day t to the three-
will be more likely to understate the true cost of funds they face in the month US dollar LIBOR fixing The highest quote submitted has a RANK score of 1, the sec-
interbank market when the bank (i) is more reliant on short-term or ond-highest a RANK score of 2, and so on. Tests of the null hypothesis of the equality of
wholesale funding; (ii) has a large portfolio of troubled assets; (iii) mean (median) ranking between normal versus stress periods are conducted using the
has recently experienced a credit downgrade; or (iv) has recently expe- t-test (Mann-Whitney test).
rienced negative investor sentiment toward the bank’s stock, as Mean Median
evidenced by large price declines. Drawing on this last insight, we pro-
Normal Stress Diff Normal Stress Diff
pose modelling the second leg of the lowballing hypothesis by estimat-
ing the following model: Bank of America 4.42 4.65 0.23 2.0 3.0 1.0
Bank of Tokyo-Mitsubishi 2.34 4.60 2.26⁎⁎⁎ 2.0 4.0 2.0⁎⁎⁎
Barclays 2.73 3.70 0.97 2.0 4.0 2.0⁎⁎⁎
Citibank 6.59 11.60 5.01⁎⁎⁎ 5.0 14.0 9.0⁎⁎⁎
RANK j;t ¼ λ0 þ λ1 RANK j;t‐1 þ λ2 R j;t‐1 þ λ3 DUM þ λ4 DUM  R j;t‐1 þ ut ð2Þ Credit Suisse 4.46 2.60 −1.86⁎⁎⁎ 4.0 1.5 −2.5⁎⁎⁎
Deutsche Bank 6.13 11.05 4.92⁎⁎⁎ 4.0 13.0 9.0⁎⁎⁎
HBOS 3.84 2.00 −1.84⁎⁎⁎ 3.0 1.5 −1.5⁎⁎⁎
where RANKi,t is the ranking of the quote submitted by bank j on day t, HSBC 5.96 6.55 0.59 4.0 5.0 1.0
JP Morgan Chase 4.79 5.80 1.01 3.0 4.5 1.5⁎⁎
Rj,t-1 is the return on the stock of bank j on day t-1, DUM is a dummy
Lloyds TSB 4.93 4.95 0.02 4.0 4.5 0.5
variable that takes the value of 1 during period of financial stress and Royal Bank of Canada 5.63 7.30 1.67⁎⁎ 5.0 7.5 2.5⁎⁎
0 otherwise, and ut is a random error term. Royal Bank of Scotland 9.58 11.75 2.18⁎ 10.0 13.0 3.0
The model includes the rank of the bank’s quote on the previous day UBS 6.55 10.95 4.40⁎⁎⁎ 5.0 12.5 7.5⁎⁎⁎
to allow for persistence in quote submissions. Accordingly, OLS ⁎⁎⁎ Significant at the 0.01 level.
estimates of λ1 are expected to be positive. ⁎⁎ Significant at the 0.05 level.
During normal market conditions when there is no stress in funding ⁎ Significant at the 0.10 level.

markets and few concerns about the creditworthiness of panel mem-

bers, we do not expect there to be any relationship between the ranking
of a bank’s LIBOR submission and the return on the bank’s stock on the
previous day i.e., OLS estimates of λ2 are not expected to be significantly
different from zero. However, during periods of market stress, when
there is uncertainty about the creditworthiness of panel members, we
conjecture that a declining stock price will encourage a panel bank to
submit a lower quote (a quote with a greater RANK score) to signal
that it is not finding it difficult to fund itself in wholesale markets
i.e., OLS estimates of λ4 will be significantly below zero. Thus the second
leg of the lowballing hypothesis predicts that:
H2A. λ4 b 0
and
H2B. λ2 + λ4 b 0
4.2. Sample and Data
Our sample period starts July 4, 2005 and ends August 29, 2008. We
begin on July 4 2005 because this is the date that Royal Bank of Canada
replaced Abbey National on the US dollar LIBOR panel. Thereafter, the
composition of the panel remained unchanged. Our sample period
does not extend beyond the end of August 2008 due to the crisis that
struck wholesale financial markets in mid-September 2008 following
the decision by Lehman Brothers to file for bankruptcy. Within weeks
the resulting turmoil had forced the major central banks to begin issuing
guarantees on interbank borrowing by many banks, including those on
the US dollar LIBOR panel.
Data on the daily three-month US dollar LIBOR fixing are obtained
from the BBA website. We focus on three-month US dollar LIBOR since
this is the ‘headline’ rate in the eurocurrency markets and the bench-
mark for many loans and derivative contracts. Data on the quotes sub-
mitted by all 16 members of the US dollar LIBOR panel are obtained
from the Thomson Reuters Tick History database of the Securities Indus-
try Research Centre Asia-Pacific (SIRCA). Stock and stock index prices
are obtained from Datastream. We collect stock price data on the 13
panel banks that are publicly-listed.14
14
Two panel banks are co-operatives – Norinchukin Bank (Japan) and Rabobank
(Netherlands) – and a third, WestLB (Germany), is a state-owned bank.
5. Empirical Results
5.1. Descriptive statistics
Table 1 reports descriptive statistics for the RANK variable for the
two sub-periods. The two sub-periods have markedly different sample
sizes – the period of normal market activity has 780 observations
while the period of market stress has only 20 observations. Recall that
the highest quote submitted to the panel will have a RANK score of 1,
the second-highest a RANK score of 2, and so on. The presence of ties
means that the average RANK score is quite low. For example, consider
the case where bank 1 submits a quote of 3.01%, banks 2 to 15 submit a
quote of 3.00% and bank 16 submits a quote of 2.99%. After the top and
bottom quartiles are removed and the average taken from the remain-
ing quotes, LIBOR will be fixed at 3.00%. Based on the quotes submitted,
bank 1 will have a RANK score of 1, banks 2 to 15 will each have a RANK
score of 2 =, and bank 16 a RANK score of 16, yielding a mean RANK
score of 2.81 and a median RANK score of 2. The presence of ties helps
explain why nearly all of the mean RANK scores during the period of
normal activity are below 8.5. The data in Table 1 shows there was
much greater dispersion in the RANK scores during the period of market
stress. This is attributed to the greater range in quote submissions and
the reduced likelihood of multiple banks submitting the same quote.
The data in Table 1 show that three banks had mean and median
RANK scores that are higher by at least 4 during the period of market
stress. These three banks are Citibank, Deutsche Bank and UBS. This is
not necessarily evidence that they began to submit artificially low
quotes to the LIBOR fixing during this period because their cost of
funds might well have been lower than that of the other banks on the
US dollar LIBOR panel.
5.2. Estimation results
Estimation results for Eqs. (1) and (2) using the short period of
financial distress are presented in Tables 2 and 3. As expected, the esti-
mation results for Eq. (1) in Table 2 show that the OLS estimates of β1
are positive, with individual estimates ranging between 0.70 and 1.68.
All estimates are significantly different from zero at the 0.001 level.
These results show that market returns are an important determinant
of stock returns during the sample period.
OLS estimates of β2 are generally negative but only one is significant-
ly different from zero. These results show that, in general, changes in the
 R. Poskitt, W. Dassanayake / International Review of Financial Analysis 42 (2015) 270–277 275

Table 2
Estimation results for Eq. (1). Table 2 reports OLS estimation results for Eq. (1) for three-month US dollar LIBOR:

R j;t ¼ β0 þ β1 Rm;t þ β2 LOSPDt þ β3 RANK j;t þ β4 DUM þ β5 DUM  RANK j;t þ ut

where Rj,t is the return on the stock of bank j on day t, LOSPDt is the change in the three-month LIBOR-OIS spread on day t, Rm,t is the return on the market index on day t, RANKj,t is the
ranking of the quote submitted by bank j on day t to the three-month US dollar LIBOR fixing, DUM is a dummy variable that takes the value of 1 during period of financial stress from 18
March 2008 to 16 April 2008 and 0 otherwise, and ut is a random error term. Standard errors in the OLS regression are estimated using the Newey and West (1987) procedure. The first leg
of the lowballing hypothesis predicts that β5 N 0 (H1A) and β3 + β5 N 0 (H1B). H1A is tested using the t-test. H1B is tested using the Wald test. Statistically significant results are indicated
in bold type. ***, ** and * indicate significance at the 0.001, 0.01 and 0.05 levels respectively.

Bank β0 β1 β2 β3 β4 β5 R2 adj. β3 + β5

Bank of America −0.0002 1.4946*** 0.0001 −0.0001 −0.0025 −0.0001 0.451 −0.0002
Bank of Tokyo-Mitsubishi −0.0013 1.2159*** −0.0000 0.0004 0.0019 0.0005 0.494 0.0008
Barclays −0.0008 1.5113*** −0.0040* 0.0000 −0.0152* 0.0047*** 0.536 0.0048***
Citibank −0.0008 1.6816*** −0.0005 −0.0001 −0.0024 0.0009 0.563 0.0008
Credit Suisse −0.0001 1.4355*** −0.0026 −0.0001 −0.0002 0.0014 0.648 0.0013
Deutsche Bank −0.0019*** 1.0944*** −0.0019 0.0002** 0.0125** −0.0010*** 0.578 −0.0008***
HBOS −0.0001 1.4596*** −0.0020 −0.0003 0.0089 −0.0041 0.396 −0.0045
HSBC −0.0006 0.8761*** −0.0003 0.0001 0.0025 −0.0001 0.589 0.0000
JP Morgan Chase 0.0002 1.5396*** −0.0007 −0.0000 0.0004 0.0000 0.519 0.0000
Lloyds TSB 0.0005 1.2244*** −0.0020 −0.0002 −0.0121* 0.0023* 0.489 0.0020*
Royal Bank of Canada 0.0004 0.7039*** −0.0002 −0.0001 −0.0135** 0.0018** 0.300 0.0017**
Royal Bank of Scotland −0.0011 1.5028*** 0.0007 −0.0000 0.0151 −0.0010 0.514 −0.0010
UBS 0.0003 1.6485*** 0.0004 −0.0003** −0.0161* 0.0027*** 0.615 0.0024***

level of stress in interbank markets has no significant impact on the
stock returns of individual banks. OLS estimates of β3 are predominantly
negative but only two estimates are significantly different from zero.
One of these estimates is positive and the other negative. This shows
that during normal market conditions the ranking of a bank’s LIBOR sub-
mission has negligible impact on the bank’s stock return.
OLS estimates of β5 tend to be more positive than negative but four
of the eight positive estimates are significantly different from zero.
Three of these estimates, those of Barclays, Royal Bank of Canada and
UBS, are significant at the 0.01 level or higher while the estimate for
Lloyds TSB is significant at the 0.05 level. In contrast, only one of the
five negative estimates of β5, that of Deutsche Bank, is significantly
different from zero, albeit at the 0.001 level.15 The estimation results
for β5 suggest moderate support for hypothesis H1A.
The coefficient sum β3 + β5 is positive for nine banks and negative
for four banks. When we test the null hypothesis that the coefficient
sum β3 + β5 equals zero using the Wald test, the null hypothesis is
rejected for all five banks identified in the previous paragraph. These
results show that the stock price of a bank is no longer insensitive to
the ranking of a bank’s submission to the LIBOR fixed during a period
of financial stress. In particular, the positive and significant coefficient
sum for Barclays, Lloyds TSB, Royal Bank of Canada and UBS shows
that the submission of a relatively higher quote to the LIBOR fixing dur-
ing a period of financial stress was associated with a significant decline
in the bank’s stock price. Again, these results suggest moderate support
for hypothesis H1B.
In summary, the results in Table 2 yield moderate support for the
first leg of our lowballing hypothesis. In the case of four banks at least,
stock prices reacted unfavourably to high LIBOR submissions during
the period of extreme financial stress in interbank markets. This sug-
gests that these four banks would have a strong incentive to lowball
LIBOR submissions during this period of turmoil. Significantly, two of
these banks, Barclays and UBS, have admitted to regulators that they
15
We examine the data for Deutsche Bank during the period of financial stress to help
shed light on this counter-intuitive result. This inspection reveals that Deutsche Bank sub-
mitted quotes that were below the subsequent LIBOR fix on 16 days during the 20-day pe-
riod of financial stress, including the last 12 consecutive days of this period. This suggests
the possibility that, during a period where media attention was being drawn to the prac-
tice of lowballing, Deutsche Bank’s pattern of consistently low submissions to the LIBOR
panel was interpreted as a sign that the bank was submitting ‘false’ quotes to disguise fi-
nancial weakness. A combination of low LIBOR quotes (and a high RANK score) and falling
stock prices would yield a negative β5 estimate.
had lowballed submissions to US dollar LIBOR. The estimation results
for Eq. (2) should provide more definitive evidence on this issue.
Estimation results for Eq. (2) are presented in Table 3.16 As expected,
OLS estimates of λ1 are positive, with individual estimates ranging
between 0.30 and 0.78, showing moderate to strong persistence in the
ranking of a bank’s LIBOR submission during all types of market condi-
tions. All estimates are significantly different from zero at the 0.001
level.
OLS estimates of λ2 are mainly negative but only one, that of UBS, is
significantly different from zero. This shows that, during normal market
conditions, the return on the bank’s stock has no significant impact on
the positioning of the bank’s LIBOR submission on the following day.
OLS estimates of λ4 are generally negative, by the margin of nine to
four. Although this is predicted under the second leg of the lowballing
hypothesis, only two of the negative estimates, those of Barclays and
RBS, are significantly different from zero. Furthermore, two of the posi-
tive estimates, those of HBOS and HSBC, are also significantly different
from zero. The conflicting estimation results for λ4 do not provide any
strong support for hypothesis H2A.
The coefficient sum λ2 + λ4 is negative for nine banks and positive
for four banks. When we test the null hypothesis that the coefficient
sum λ2 + λ4 equals zero using the Wald test, the null hypothesis is
rejected for five banks, four of which have a significantly negative coef-
ficient sum. The four banks are Barclays, Royal Bank of Canada, RBS and
UBS. Counter-intuitively, the coefficient sum is positive and significantly
different from zero for HSBC. Nonetheless, the tenor of the results of the
Wald test suggest moderate support for hypothesis H2B.
Overall, the results in Table 3 show that, for five of the panel banks,
the ranking of the bank’s submission to the LIBOR fixing is no longer in-
sensitive to the bank’s stock return on the previous day. In particular,
the significant negative coefficient sum for four banks shows that a
stock price decline during a period of financial stress is likely to result
in the submission of a relatively lower quote to the LIBOR fixing on
the following day.
Our results for Eqs. (1) and (2) are remarkably consistent in that
they identify the same group of banks as exhibiting behaviour consis-
tent with lowballing the US dollar LIBOR fixing during the period of
financial stress that followed the collapse of Bear Stearns. Our results
show that during this period, the stock prices of these banks reacted
negatively to high quote submissions and declines in the stock prices
16
The LM statistics show that the null hypothesis of no serial correlation in residuals is
rejected. Respecifying Eq. (2) does not solve this problem.
276 R. Poskitt, W. Dassanayake / International Review of Financial Analysis 42 (2015) 270–277

Table 3
Estimation results for Eq. (2). Table 3 reports OLS estimation results for Eq. (2) for three-month US dollar LIBOR:

RANK j;t ¼ λ0 þ λ1 RANK j;t‐1 þ λ2 R j;t‐1 þ λ3 DUM þ λ4 DUM  R j;t‐1 þ ut

where RANKj,t is the ranking of the quote submitted by bank j on day t to the three-month US dollar LIBOR fixing, Rj,t-1 is the return on the stock of bank j on day t-1, DUM is a dummy
variable that takes the value of 1 during period of financial stress from 18 March 2008 to 16 April 2008 and 0 otherwise, and ut is a random error term. Standard errors in the OLS regression
are estimated using the Newey and West (1987) procedure. The second leg of the lowballing hypothesis predicts that λ4 b 0 (H2A) and λ2 + λ4 N 0 (H2B). H2A is tested using the t-test.
H2B is tested using the Wald test. Statistically significant results are indicated in bold type. ***, ** and * indicate significance at the 0.001, 0.01 and 0.5 levels respectively.

Bank λ0 λ1 λ2 λ3 λ4 R2 adj. λ2 + λ4

Bank of America 1.5189*** 0.6549*** −1.3880 0.1166 −12.1153 0.427 −13.5033

Bank of Tokyo-Mitsubishi 1.4257*** 0.3928*** −1.9571 1.3827*** −8.4950 0.189 −10.4521
Barclays 1.5207*** 0.4426*** 3.0298 0.6542*** −28.3547*** 0.196 −25.3249***
Citibank 2.5759*** 0.6132*** 4.3378 1.9807 −5.4531 0.388 −1.1154
Credit Suisse 3.1196*** 0.2974*** −9.5895 −1.427** 15.7915 0.098 6.2020
Deutsche Bank 2.7977*** 0.5416*** 5.4503 2.2271** 35.5248 0.311 40.9751
HBOS 2.6323*** 0.3122*** −8.3505 −1.3242*** 16.5977* 0.110 8.2472
HSBC 1.8228*** 0.6976*** −5.0080 −0.4798 99.5623** 0.483 94.5543**
JP Morgan Chase 1.0786*** 0.7786*** 3.2998 0.1721 −9.5507 0.600 −6.2509
Lloyds TSB 2.0301*** 0.5860*** −0.6299 0.2394 −21.9504 0.342 −22.5803
Royal Bank of Canada 3.9548*** 0.3022*** −17.5835 1.1505 −16.3950 0.095 −33.9785**
Royal Bank of Scotland 3.4333*** 0.6428*** 9.019 0.8238 −41.5599** 0.417 −32.5407*
UBS 3.5162*** 0.4661*** −21.1380** 2.5366*** −8.5445 0.244 −29.6825*

triggered the submission of high quotes to the LIBOR fixing the follow-
ing day.
We also note that the R2s are slightly lower for Eq. (2). This could
reflect the fact that US dollar LIBOR submissions were subject to non-
market influences such as requests from the money market and deriva-
tives desks of the bank. The investigations of regulators have shown that
a number of panel banks frequently engaged in the deliberate manipu-
lation of LIBOR submissions to suit the money market and derivative
positions of the bank. Indeed, in the case of one bank, the bonuses of
the LIBOR submitters were tied to the profitability of the money market
trading book!17
We conduct robustness tests by re-estimating Eqs. (1) and (2) using
a longer period of financial distress that commenced in early August
2007. The estimation results for Eqs. (1) are much less supportive of
the lowballing hypothesis than those reported in Table 2. In particular,
none of the estimates of β5 are significantly different from zero. Not
surprisingly, when we employ the Wald test, the coefficient sum
β3 + β5 is not found to be significantly different from zero for any of
the panel banks. The estimation results for Eq. (2) are also much less
supportive of the lowballing hypothesis than those reported in
Table 3. Most of the estimates of λ4 are positive, although the estimate
for Barclays has the predicted negative sign and is significantly different
from zero. When we employ the Wald test, the coefficient sum λ2 + λ4
is not found to be significantly different from zero for any of the panel
banks. Overall, the robustness analysis shows that our model of the
lowballing hypothesis performs poorly when we define the period of
financial stress more broadly. The rank of a bank’s LIBOR submission
does not have any impact on the bank’s stock return and a bank’s
stock return has no influence on the ranks of a bank’s LIBOR submission
on the following day, the exception being Barclays. One possible inter-
pretation of this outcome is that although the global financial crisis
might well have begun in early August 2007, the interbank market
only became severely stressed in mid-March 2008 when the failure of
the large US investment bank, Bear Stearns, made it clear to market par-
ticipants that they needed to pay much greater attention to the issue of
counterparty risk in the interbank market.
6. Conclusion
This paper examines the behaviour of banks on the three-month US
dollar LIBOR panel for evidence consistent with the lowballing of quote
submissions. We model the lowballing hypothesis using two equations.
Our first equation models the stock return on a bank as a function of
market returns and the ranking of a bank’s quote submission to the
LIBOR fixing. We argue that a high quote (i.e. low ranking score) will
signal that the bank is having difficulty raising funds and trigger a
stock price decline. Our second equation models the ranking of a
bank’s quote submission as a function of the ranking of its quote sub-
mission on the previous day and its stock return on the previous day.
We argue that a stock price decline will encourage a bank to submit a
low quote to the LIBOR fixing to reassure market participants of its
good financial condition.
Although our sample period extends from July 2005 to August 2008,
we focus our attention on a period of extreme stress in financial markets
that followed the collapse of Bear Stearns in mid-March 2008 and ended
in mid-April 2008. Our estimation results for the first equation show
that during the period of financial stress, the stock returns of four
banks – Barclays, Lloyds TSB, Royal Bank of Canada and UBS – were sig-
nificantly negatively related to the submission of high quotes to the
LIBOR fixing. This suggests that these banks had strong incentives to
lowball their LIBOR submissions. Our estimation results for our second
equation show that the positioning of a bank’s LIBOR submission was
highly sensitive to the previous day’s stock return for four banks –
Barclays, Royal Bank of Canada, RBS and UBS. The behaviour of these
four banks is consistent with submitting artificially low quotes to influ-
ence market perceptions of the financial condition of the bank.
In summary, our model had some success in identifying the two
banks – Barclays and UBS – that had confessed to lowballing their
submissions to the US dollar LIBOR fixing. However, given that the top
and bottom quartile of quote submissions are excluded from the calcu-
lation of the LIBOR, our analysis suggests that such behaviour on the
part of just two banks is unlikely to have imparted much of a downward
bias to the three-month US dollar LIBOR fixing.

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