Libor Faces Review Amid Rate-Rigging Scandal

by CFO Innovation Asia Staff, 03 July 2012

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Bank Borrowing/Credit Lines Finance and Banking

tags:
Barclays Capital Barclays Libor scandal Corporate finance interest rate loans Libor

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The latest case involving the Barclays Libor rate-fixing scandal could affect Libor rate-setting going forward which is important for CFOs sourcing loans, since Libor rates often determine how much their company needs to pay on borrowings.

The London Interbank Offered Rate (Libor) is the average interest rate estimated by leading banks in London, for loans to one another, or the Interbank. Libor rates are calculated for different currencies each day using quotes submitted by banks on a panel, based on the banks' estimated borrowing costs. Libor is one of the most widely used interest rates, affecting the cost of everything from business-account overdrafts to credit cards to mortgages.

After the financial crisis, the Libor rate also was seen as a guide to the health of bank’s balance sheets.

Inaccuracies in the Libor affect investment returns and borrowing costs, for individuals, companies and professional investors.

Barclays Plc (BARC) was fined 290 million pounds (US$451.4 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting it submitted false London and euro interbank offered rates.

In the wake of the scandal, Barclays Plc Chairman Marcus Agius resigned, saying in a statement that “last week’s events, evidencing as they do unacceptable standards of behavior within the bank, have dealt a devastating blow to Barclays’s reputation.”

The U.S. Commodity Futures Trading Commission says Barclays traders in New York, London and Tokyo attempted to manipulate rates to benefit their positions in swaps and futures that were tied to the rates. The agency says the traders made the requests regularly and sometimes daily from mid-2005 through 2007 and sometimes later until 2009.

The Guardian reports that Barclays traders were pushing the Libor rate up at one stage (to enhance their profits), which could have pushed mortgage rates higher than they should have been. But the indications are that during the financial crisis, Libor was manipulated downwards. So borrowers enjoyed interest rates lower than they might otherwise have had to pay.

“Because mortgages, student loans, financial derivatives, and other financial products rely on Libor and Euribor as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide,” said Lanny A. Breuer, assistant attorney general of the Justice Department’s Criminal Division.

At least 16 banks in addition to Barclays are being investigated. Inquiries into alleged market manipulation are being carried out in the UK, the US, Japan, Canada, the European Union and Singapore and involve nine government agencies.

Banks that have disclosed they are being investigated include Citigroup Inc., Deutsche Bank AG, HSBC Holdings HBC, J.P. Morgan Chase, and Royal Bank of Scotland.

Britain has launched an independent review to restore trust in Libor. The inquiry is expected to focus on possible criminal sanctions against people who breach future regulations on the rate.

Meanwhile, the British Bankers' Association has released a statement announcing it is investigating how it can change the way Libor is set.

"The current LIBOR review, with which our authorities are fully engaged, has been underway since March this year and is considering all aspects including the setting process. As part of this review we will now be asking the authorities to consider in what manner the LIBOR setting mechanism should be regulated in the future," said the BBA in a statement.

The BBA says contributor banks must meet the necessary regulatory obligations and observe the highest standards in ensuring the accuracy of the rate.

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CFO Innovation Asia Staff

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