The London Interbank Offered Rate--the Libor--is a benchmark interest rate based on the rates at which banks lend unsecured funds to each other on the London interbank market. The Libor is published daily by the British Bankers' Association (BBA). The rate is set every morning, at around 11am, by a panel of banks and overseen by trade body the British Bankers' Association, and then the global banks submit their borrowing costs to the Thomson Reuters data collection service. The calculation agent works out discarding the top four and bottom four rates, and taking the average of the rest of the rates to determine the Libor. 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. Many banks worldwide use Libor as a base rate for setting interest rates on consumer and corporate loans. When the Libor rises, rates and payments on loans often increase; they fall when the Libor goes down.
Effect of Libor:
An increase in Libor can add hundreds of pounds to households' annual mortgage repayments or 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. It also influences savings rates. If banks can borrow more cheaply from each other then they don't need to offer such good returns to savers.
Barclays:
Barclays is a British multinational banking and financial services company headquartered in London, United Kingdom. It has operations in over 50 countries and territories across Africa, Asia, Europe, North America and South America and around 48 million customers.[3] As of 31 December 2010 it had total assets of US$2.33 trillion, the fourth-largest of any bank worldwide.
BARCLAYS ROLE IN LIBOR SCANDAL:
Barclays said its traders have communicated with its staff who submitted rates to the BBA, asking that the rates be adjusted to increase the traders' chance of success on credit transactions.
Past Analysis:
Banks submit each day the rate at which they are borrowing money from other banks. A high rate would indicate it is more difficult to borrow money. During the 2008 financial crisis a high Libor rate would have been an indicator that a bank is struggling.
The scandal began in 2005 when Barclays (and possibly other major banks) began to lie about their borrowing costs. Barclays and fifteen other global financial institutions, reportedly manipulated Libor during the global economic upswing of 2005-2007 so that its traders could make profits on derivatives. Certain traders at Barclays coordinated with other banks to alter their rates as well. Emails uncovered as part of a three-year investigation into claims that Barclays and other banks attempted to inflate and suppress Libor show the extent of the scandal.
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Barclay's agreed that this was an attempt to manipulate the Libor, and that their efforts had some effect - it's hard to tell exactly how much - on the rate itself. There is also evidence that there was tacit encouragement of that manipulation by major financial authorities. Barclays settled charges that it manipulated the Libor rate, for its own benefit by submitting falsified numbers as far back as 2005. According to the Financial Services Authority, Barclay's derivatives traders routinely asked for submitters to help them profit from their trades by sending in numbers that were either higher or lower than they should have been. The report says Barclays submitted inaccurate rates "on numerous occasions" between 2005 and 2008 at the behest of at least 14 Barclays derivatives traders. "Barclays could have benefitted from this misconduct to the detriment of other market participants. Where Barclays acted in concert with other banks, the risk of manipulation increased materially," according to the FSA. At times, the Barclays traders also tried to influence the submissions of other banks, and passed along requests from their counterparts to Barclay's submitters.
What has emerged from the Barclay's Bank inquiry is evidence that banks may have, in fact, been deliberately manipulating Libor rates for years. The evidence so far is that one arm of a bank responding to the Libor poll would change their number based on what another arm of the same bank wanted -- and that other arm could consist of the bank's traders who make their money on whether the rate goes up or down.
Present Analysis:
The Financial Services Authority (FSA) is now investigating both the bank and four current and former senior employees, including finance director Chris Lucas. Several banks are currently being investigated, both in the UK and the US, for allegedly manipulating Libor. It appears that Barclays believes other banks will soon turn out to be more culpable in the scandal than them.
About a dozen banks are being investigated as part of the Libor probe, including state-backed lenders Lloyds Banking Group and Royal Bank of Scotland, as well as many of the largest US and European investment banks. Emails uncovered as part of a three-year investigation into claims that Barclays and other banks attempted to inflate and suppress Libor show the extent of the scandal.
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Barclays made a deferred bonus charge of £655m, relating to money earned for past performance being handed out now. This marked a rise from £458m in the first half of 2011.It emerged this week that Britain's financial regulator warned the Barclays board in February that its culture was too aggressive and must change. In the latest scandal, Barclays was fined a record $450 million by U.S. and UK regulators for rigging interbank interest rates between 2005 and 2009.
More than a dozen other banks are also being probed as part of the rate rigging investigation and many are expected to be fined, but for now Barclays is standing alone in the centre of the latest storm over standards in investment banking. But in the current environment, a sale or a spin-off of the investment bank might attract few suitors or investors, with depressed valuations and limited appetite for bank stock.
The Barclays scandal in particular damaged the reputations of the British regulator, the Financial Services Authority, and the Bank of England.
Future:
The idea that Barclays kept rates down for years is ludicrous. No commercial bank can keep rates down if investors are willing to pay for a different allocation of capital than what the banks want. The bankers can make money at the margin, paying a little less for loans. With allegations that banks has been culpable for the manipulations of the interest rates the reactions will likely be a tsunami of lawsuits, of course calls for tighter regulations. This means that millions of consumers, investors and businesses have been paying the wrong interest rate. Or rather, they haven't been paying an interest rate that is set according to some legitimate benchmark. Instead they are paying a rate based on a gentlemen's agreement at financial institutions, a method that practically incentivizes those banks to game the system to maximize their profits.
In the next 12 months, as its market standing and franchise has suffered, the Barclays Bank group will have to make a loan loss provision of USD 5.75 billion. This indicates that they will definitely need UK Government bailout well within a year. The UK government is already planning to nationalize the bank and make it a pure local British Bank going forward with an Australian as its head.
The Libor scandal will likely spur regulatory intervention at the top levels of management at global banks and provide greater impetus for the adoption of international and national regulations. The bank may move towards a transacted rate. We don't know just how deep this scandal goes. But the fact is that if a fundamental component of our financial system has been or is being manipulated, we have the right to know about it. Banks are not above the law and they should not be allowed to operate in secrecy, especially when they have a history of taxpayer bailout and when we are forced to rely on them to provide capital for economic growth.
CONCLUSION:
The shareholder and political pressures on Barclays could lead to broader pressure on the bank to shift its business model away from investment banking and reform perceived failures in its business culture.
It is clear that what happened at Barclays, and potentially other banks, was completely unacceptable, was systematic of a financial system that elevated greed above all other concerns and brought our economy to its knees I think fines and public criticism will not stop these behaviours. These behaviours will not stop until the people perpetrate into it or responsible for overseeing them, face the prospect of criminal charges and the prospect of severe punishment.
This cannot be about a slap on the wrist, a fine and the foregoing of bonuses. To believe that is the end of the matter would be totally wrong. When ordinary people break the law, they face charges, prosecution and punishment. We need to know who knew what when, and criminal prosecutions should follow against those who broke the law. The same should happen here. The public who are paying the price for bankers' irresponsibility will expect nothing less. We need the strongest punishment, a change in regulation and a change in the culture of our banks.
