LIBOR SCANDEL
The scandal has left financial markets reeling and one again
called into question the ethics of the banking industry.
What is Libor?
Every morning banks work out how much money they need to
borrow from their peers to plug any holes in their balance sheets. Or, if they
have an excess of available cash, how much they can afford to lend. What
Libor – the London Inter-Bank Offered Rate – does is formally measure the cost
of this inter-bank lending, setting out the average rate banks pay to borrow
from one another.
How is Libor calculated?
There are 150 different Libor rates calculated on a daily
basis by Thomson Reuters for 15 borrowing periods ranging from overnight to 12
months, spanning 10 different currencies.These rates are calculated based on
data submitted by a panel of major banks – the number of banks on the panel
varies according to the currency. The UK’s sterling rate, for example, is based
on submissions from 16 banks, while the US dollar rate, on the other hand, is
calculated using a panel of 18. Each bank is asked the same question: ‘At what
rate could you borrow funds, were you to do so, by asking for and then
accepting inter-bank offers in a reasonable market size just prior to 11am?’ So
basically, if you need to borrow cash from your fellow banker friends, how much
would they charge you for it? Once the rates are submitted, the four highest
and four lowest rates are ignored, and those left are used to calculate the
Libor rate which, along with the individual rates submitted by each bank, are
then published before midday UK time every weekday.This process was first
introduced by the British Banker’s Assocation (BBA) in 1986, and is overseen by
the Foreign Exchange and Money Markets Committee.
What does Libor show?
When a bank lends money to a customer, it will assess the
risk they pose and price the loan accordingly. The riskier you appear, the more
you will have to payThe
way banks lend to one another is no different – when a bank is charged a higher
rate it means other banks have less confidence in it.As the average rate,
therefore, Libor reflects the strength of the banking sector as a whole, and as
the BBA puts it ‘acts as a barometer of how global markets are reacting to the
prevailing conditions’. So during the credit crunch, for example, when
confidence in the banking sector was at its lowest, Libor shot up to an
all-time high.
What else is Libor used for?
A number of financial products use Libor as a
benchmark against which they price products. So, just as you might take out a
mortgage with an interest rate linked to movements in the Bank of England base
rate or invest in a fund that follows the FTSE 100, there are financial
products available that track changes in Libor. Complex derivative products
used by professional traders in the multi-trillion-pound bond and currency
markets are commonly priced using Libor.
So, what did Barclays do?
Barclays was found by US and UK regulators to
have manipulated or ‘fixed’ its rate submissions. In an open letter to the chairman of
the Treasury Select Committee, Bob Diamond, chief executive of Barclays,
explained that the authorities had highlighted two issues. First, a small
number of individual traders had attempted to influence the bank’s interest
rate submissions in order to boost their own desk’s profits. Operating purely
for their own benefit, Diamond said this behaviour was 'reprehensible', but he
stressed that no one more senior than immediate desk supervisors were aware of
the requests by traders.
The second, and arguably more concerning,
issue raised was that during the credit crisis Barclays had reduced its Libor
submissions to protect the reputation of the bank from negative speculation
which arose as a result of Barclays’ higher rate submissions in comparison with
other banks – i.e. the bank wanted to make itself look stronger. Barclays
has since revealed that the bank's chief operating officer Jerry del Missier
was the most senior member of staff to give the order to rig rates.
The bank released a note written by Diamond
detailing a phone call he had received from Paul Tucker, the deputy governor of
the Bank, during which Tucker said he'd 'received calls from a number of senior
figures within Whitehall to question why Barclays was always towards the top
end of the Libor pricing’.
Diamond then relayed
this conversation to del Missier who interpreted it as an instruction to lower
the rate and therefore passed down a direction to that effect to rate
submitters. Diamond, however, maintains he did not believe it was an
instruction, and said he knew nothing of what was being done until the FSA
released its findings in June.
What are the regulators
doing?
As comeuppance for its actions, Barclays was
slapped by the FSA with a record £59.5 million fine – reduced from £85 million
in return for the bank’s co-operation – in addition to a $200 million (£128
million) fine from the US Commodity Futures Trading Commission (CFTC) and a
further $160 million (£103 million) from the US Department of Justice. Diamond,
meanwhile, was cornered into resigning as chief executive
and called before the Treasury Select Committee to answer questions on what exactly
happened.
Barclays chairman Marcus Agius, who announced his resignation only to be later
re-instated to lead the search for Diamond's successor, is also expected to
appear before the Committee, as are a number of other Barclays executives,
including del Missier, who has also resigned.
Bank of England deputy governor Paul Tucker
will also be invited to speak after actually requesting a hearing to clear up
his role in the scandal. The Serious Fraud Office, meanwhile, is currently
looking at whether it can bring criminal prosecutions against the bank and the
individuals involved. It hopes to announce a decision by the end of the month. And
the UK government has said it is launching a formal inquiry into banking
standards following the scandal. The aim is for the cross-party investigation,
which will be led by head of the Treasury Select Committee Andrew Tyrie, to be
completed by the time the government pushes through its white paper on banking
reforms early next year.
Are other banks involved?
Almost certainly. RBS and UBS are both also
under investigation by the FSA and could well be facing fines on a similar
scale. Chancellor George Osborne also named HSBC, but the FSA has since said
that while it does have a a number of ongoing investigations HSBC is not one of
them.
However, the FSA can only speak from the
point of view of the UK, and as we’ve already seen, investigations are not
limited to the UK. Authorities around the world are currently wading through
the files of a whole host of banks, looking into how Libor and similar interest
rate benchmarks, such as Euribor and Japan’s Tibor, have been calculated.
How could this affect me?
The rates banks pay to borrow money affect
how much they charge customers for loans and mortgages. When costs for the
banks go up, the price customers pay also goes up. It could be argued,
therefore, that any manipulation of inter-banking lending rates will affect
customers. There are also roughly 250,000 borrowers with mortgages directly
linked to Libor, explained Ray Boulger, of mortgage lender John Charcol,
although most would have been taken out by buy-to-let, sub-prime and commercial
borrowers. As this type of mortgage is usually linked to the three monthly
Libor rates it would therefore have likely been affected, he said. However,
before the credit crisis rates were also only manipulated very slightly,
otherwise it would have been obvious, and were not altered every day. During
the crisis, meanwhile, Barclays manipulated the rate lower to appear more
creditworthy so any impact then would have actually been beneficial to mortgage
borrowers. But, if mortgage borrowers benefited, it’s possible that
institutional investors which placed money in Libor-linked products could have
lost out, impacting savers who had money invested in a pension funds, for
example. The problem is that the exact amount of detriment Barclays’ actions
had will be difficult to determine and so could result in a legal nightmare for
anyone trying to sue. Meanwhile, you need only look at the market’s reaction to
Barclays’ fine this week to see that those with shares in the banks are also
likely to take a serious hit over the coming months.
Why the Barclays libor revelation
matters
Once again the banking sector – which we are
relying on to pull our economy out of recession – has given us a
reason not to trust them. Manipulating
something so fundamental to the banking industry is quite frankly a new low.
And what makes matters worse is that in the very same week four major banks
found themselves at the centre of yet another mis-selling scandal – this time interest rate protection
products to small and medium sized businesses. How Diamond had the audacity to
kick up such a fuss about his bonus payment when he knew this scandal was
brewing is beyond me – and with the government currently exploring possible
criminal charges, conceding to sacrifice this year’s bonus seems wholly
inadequate. What’s more, with Barclays’ fine thought to be only the very tip of
what appears to be an enormous iceberg, it’s clear things need to change on a
larger scale – the proposals by the Independent Commission on Banking (ICB) on
reforming our banking sector need to be brought forward and bankers need to be
made accountable for their actions. People should be quite rightly outraged
.Definition
of 'Mumbai Interbank Offered Rate - MIBOR'
The interest rate at
which banks can borrow funds, in marketable size, from other banks in the
Indian interbank market. The Mumbai Interbank Offered Rate (MIBOR) is
calculated everyday by the National Stock Exchange of India (NSEIL) as a
weighted average of lending rates of a group of banks, on funds lent to
first-class borrowers.
The MIBOR was launched
on June 15, 1998 by the Committee for the Development of the Debt Market, as an
overnight rate. The NSEIL launched the 14-day MIBOR on November 10, 1998, and
the one month and three month MIBORs on December 1, 1998. Since the launch,
MIBOR rates have been used as benchmark rates for the majority of money market
deals made in India.
Australian dollar (AUD)
Canadian dollar (CAD)
Swiss franc (CHF)
Danish krone (DKK)
Euro (EUR)
British pound sterling
(GBP)
Japanese yen (JPY)
New Zealand dollar
(NZD)
Swedish krona (SEK)
U.S. dollar (USD)
Earlier 16 in 2000 by
the entry of euro it is 10 now
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