Tuesday, July 10, 2012

Barclays LIBOR Rate Manipulation: In Banks We Trust?

Though this somewhat riveting financial news story is still developing, will the 453-million US dollar fine and subsequent civil lawsuit against Barclays for interbank lending rate manipulation herald a more transparent banking system? 

By: Ringo Bones 

The recent LIBOR Rate manipulation scandal first came to light to us in the general public when the major news providers did an investigative news reporting on Barclays being fined 453-million US dollars back in June 28, 2012 for manipulating the interbank lending or LIBOR Rate. Whether this will lead to increased transparency to the world’s banks and other financial institutions is still open to debate since this recent “financial scandal” could yet become another long-winded economic / financial epic akin to the recent Greek Debt Crisis. 

Leading tenured economists now cite that the very way the LIBOR Rate is regulated is very much outdated – compared to back in 1984 - in our somewhat austere economic climate of our post 2008 Global Credit Crunch world. But Barclays admitting of the “financial master stroke” of LIBOR Rate manipulation looks suspiciously criminal from the FSA’s point-of-view. 

By July 2, 2012, Barclays chairman Markus Agius – who held the position since 2006 – resigns as the rate fixing scandal ripples throughout the financial world. The next day, Barclays CEO Bob Diamond resigns after accusations of using Markus Agius as a “fall guy” on the LIBOR Rate fixing scandal became headline news in the financial world. And by the way, Markus Agius is also the head of the UK Banking Association. As the Barclays’ “top brass” reshuffles, the FSA cited that Barclays conduct was so serous and widespread that the agency also placed the RBS and HSBC under their watch list for complicity with Barclays on the LIBOR Rate fixing scandal. So what is this “LIBOR Rate” anyway? 

LIBOR Rate is defined as the rate at which an individual Contributor Panel bank could borrow funds, where it is to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to the 11:00 AM London time deadline. The rate at which each bank submits must be formed from the banker’s perception of cost of funds in the interbank market. The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is usually abbreviated to LIBOR or Libor, or more officially to BBA Libor for British Bankers’ Association Libor or the trademark bba libor. It is a benchmark – along with the Euribor – for interest rates all around the world. 

LIBOR Rates are calculated for different lending periods – overnight, one week, one month, two months, six months, etc. – and published daily at 11 AM London time by the British Bankers’ Association. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to – and typically higher than – the Libor. The current procedure of determining the LIBOR Rate was introduced back in 1984 when it became apparent that an increasing number of banks were trading actively in a variety of relatively new market instruments – namely: interest rate swaps, foreign currency options and forward rate agreements. 

Back in July 4, 2012, then Barclays CEO Bob Diamond declared that he is not resigning without a fight and that he may divulge evidence that UK financial regulators – including the Bank of England’s deputy governor Paul Tucker of giving Barclays the carte blanche – i.e. full discretionary powers – to reduce the somewhat high LIBOR Rate that was strangling the UK economy during their “wink-and-nod” laden phone call. Bob Diamond is due to be “grilled” by the MPs whether the Bank of England and Whitehall officials will be implicated in the recent LIBOR Rate manipulation scandal is yet to be determined. While the UK’s Serious Fraud Office (SFO) launches its own LIBOR Rate manipulation investigation.  

At present, the LIBOR interbank lending key rate plays a major role in global financial markets. But many tenured economists cite LIBOR as an anachronism and it doesn’t really work in practice. And the oft-cited proof of this was the global market events that lead to the 2008 Global Credit Crunch. Does the LIBOR Rate need to be reformed or to be replaced entirely by something more suitable to our increasingly globalized financial markets? 


Leila said...

US Federal Reserve chairman Ben Bernanke calls the LIBOR Rate a "flawed benchmark" as far back as 2008. Bernanke also said he doesn't have full confidence of the system that sets the LIBOR Rate. By the way, how come OPEC can use the similar "arcane" method used in LIBOR Rate in setting the global price per barrel of crude oil and nobody protests?

April Rain said...

The latest development of this LIBOR Rate fixing scandal now revolves around the New York Attorney General and the Connecticut Attorney General serving subpoenas on 7 banks - i.e. Barclays, HSBC, RBS, JP Morgan Chase, CITI Group, UBS and Deutsche Bank. Might as well since LIBOR Rate transactions globally are worth 5-trillion US dollars.

Sarah's Scene said...

The LIBOR Rate also determines how much pensioners earn from their pension entitlements.