Why The UK Libor Scandal Is A Worldwide Problem
It started out as a small, almost inconsequential issue about an obscure number. For the first few days after the London inter-bank offered rate (Libor) fixing controversy started, it was widely touted to be a localized problem caused by a few rogue traders. However as the story began to emerge, it became clear that far from a few suspect individuals, the entirety of the UK banking industry could be involved – and those banking institutions that were had loaned massive amounts of money abroad. The problem had gone global.
Inter-bank lending is vital to a smooth running economy, but something that many banks have found difficult to do during the last few years due to nervousness about bank stability. Banks Like Northern Rock paid the price for not being able to inspire confidence in their borrowers, and financial institutions wanted desperately to avoid another nationalization with consumers having to foot the bill. Well, that was one of the reasons given by Barclays when pressed for why it had spent so much effort trying to keep the Libor rate low. However, what this reason doesn’t adequately explain is why it was falsifying its figures long before this change of heart in 2008, what other banks it was doing this with and the fiscal impact that has had on consumers and business owners who borrowed large sums of money as Libor Loans.
Libor – The Worldwide Benchmark
Every day at 11am the Libor rate is announced. From a tiny room with few staff, the basic figures that interest rates are made up of and which banks across the world will have to pay to one another are decided and then circulated. Every day 18 banks submit details of what they would pay a creditor if they had to borrow extra money. Of the 18, the four highest and lowest are discarded, and the rest are then averaged. This average figure is the Libor rate. However, the problems start when someone tries to artificially push the rates higher or lower on purpose, which is what happened with Barclays and now we know many others.
When Libor Goes Bad – Rigging The Numbers
Libor may seem like an obscure number with not a massive amount of relevance, until you realize that it is used as a benchmark for almost every financial transaction around the world. From simple mortgages to complex investments, some £500 trillion-worth of financial products and services is based on the Libor rate, and your loan and savings rate are determined by it.
Every increase in the rate that a bank is charged when it borrows money from another is passed on to the consumer who buys that bank’s financial products, and that bank could be in any country in the world. Investigations in Libor rigging have shown that far from being a UK problem, banks in Canada, America, Japan, the EU and Switzerland have been involved too. So far 20 big banks have been named and shamed in the ongoing investigations.
Libor rigging is truly an international scandal.
What Does Libor Rigging Do?
For a bank to engage in Libor rigging it has to be getting something good from the deal. Prior to 2008, experts believe this was simply extra profits and covering losses, manufacturing money out of thin air by nothing more than conspiring to move an obscure and little know number up a few notches. Some of the bank’s investment traders would cover their tracks after losing money on a bad investment by altering the number they submitted for the Libor calculations. It is estimated that pre-recession, Barclays could lose or gain £20m just by normal fluctuations in the interest rates. The temptation to change that so they gained more often was too tempting.
However, in the wake of the recession, Libor rigging appears to have been used by banks around the world as a stability measure. Following the very public fall from grace for Northern Rock, banks searched desperately for ways to boost public confidence in their businesses and avoid bank runs, which could cripple them and lead to nationalization.
So, those banks that were weak did not want to knowingly publicise the fact that they should be charged high interbank interest, in much the same way they would for a customer who was a credit risk, so they knowingly submitted low figures to make them look like a good lending bet.
So What Is Happening To Libor Now?
As soon as the interest rate fixing came to light, the financial market was corrected to take account of any possible discrepancy, which works out to small number for consumers but massive numbers for the banks. Those banks pretending to be highly stable when they were not were unmasked and their borrowing rates increased to reflect their true financial standing.
Although Barclays has settled and been fined by the US and UK financial regulators, investigations into Libor fixing are still ongoing around the world with the total bill for cleaning up the mess estimated to run into billions.
The true extent and ramifications of Libor fixing are still unknown, but one thing is for sure – its reach will have made it into the pockets of every consumer in the UK already.
Why The UK Libor Scandal Is A Worldwide Problem