Barclays Scandal - What is LIBOR? and How it affects you
Jul 03, 2012
What is LIBOR?
It stands for the London InterBank Offer Rate and is the interest banks charge to borrow from each other. Banks rely on this money to lend to customers and businesses. Its equivalent in Europe is called Euribor.
How does it affect me?
The rate that banks pay to raise money affects how much they charge on loans and mortgages. An increase in Libor can add hundreds of pounds to households’ annual mortgage repayments or on a loan to a small business.
This was seen with dramatic effect in the run up to the financial crisis, when Libor soared, and lenders raised their rates. It is also used as the benchmark for trillions of pounds in complex financial investments.
How is it set?
The rate is set every morning by a panel of banks and overseen by trade body, the British Bankers’ Association. Each bank sets the rates at which it believes it can borrow, from overnight to 12 months. There are 150 Libor rates, spanning ten currencies and 15 time periods.
What has Barclays been doing?
Barclays’ traders who speculated on movements in interest rates were manipulating Libor in an effort to make huge profits.
Its traders were conspiring with the ‘submitters’ at the bank who lodge the bank’s Libor rates every morning. Depending on the way they were betting, traders would urge these submitters to increase the Libor rate or lower it.
Barclays’ traders also conspired with ex-employees working at other banks to try to influence their Libor submissions. During the financial crisis Barclays also fiddled the figures to dupe the market into thinking that it was more financially sound than it was.
Libor is often seen as a barometer of how healthy a bank is. Just as customers with bad credit records have to pay higher interest rates, banks that are deemed to be in poor financial health are charged more to borrow. Barclays became anxious that its Libor rate was higher than many of its peers and that they were fiddling the figures. It decided to join the party.
Are any other banks doing this?
It is likely that this is just the tip of the iceberg. Barclays is just the first to get caught.
For the last two years a dozen regulators on three continents have been combing through the files of more than 20 banks involved in the rate setting process.
Swiss bank UBS is understood to have already suspended a number of traders. Royal Bank of Scotland, Lloyds, and HSBC yesterday said they were helping the Financial Services Authority with its enquiries.