Q&A: What the Libor scandal means for the banks – and you
Friday 29 June 2012
Q. What is Libor?
Libor is an interest rate that is based on what banks are charged when they borrow money from other banks. It stands for the London Interbank Offered Rate and is overseen by the British Bankers Association (BBA), which is chaired by Marcus Agius. He also just happens to be the chairman of Barclays.
Q. Why on earth does it matter?
Ah. While the price of ordinary mortgages is based on Bank of England base rates, the rate borrowers pay on many other products depends on the Libor. These include "sub-prime" mortgages offered to those with poor credit ratings, certain credit cards personal loans and loans to small (and big) businesses.
Q. How is it calculated?
The Libor rate is calculated by Thomson Reuters, the media and data company, on behalf of the BBA. Banks report their borrowing costs to it, which must be based on what they pay in London for loans over various time periods from as little as a day to much longer. Thomson Reuters then produces an average which is the Libor. Because banks might pay different rates in different currencies there is a Libor set for sterling, dollars, yen, etc
Q. Are consumers affected?
Potentially, that is if you (or your business) had a financial product whose price was linked to Libor. The difficulty faced by consumers is first of all proving they had suffered a loss as a result of their bank's actions. Working out how much that could be is theoretically much, much more complicated. Libor changes every day and the regulators said while Barclays attempted to manipulate it, it didn't necessarily succeed. That said, lawyers in the US are already girding their loins for a very big fight. Barclays claims that its own customers would not have been affected – but many other financial companies do use Libor.
Q. Where will the £290m fines go?
The way the financial regulatory system works is if a bank is fined the money goes into the regulator's coffers. At the moment that's the Financial Services Authority, in future the Financial Conduct Authority. The money will reduce the fees paid by other financial institutions (banks that kept their noses clean, brokers, fund managers, insurance companies, etc). The Chancellor has, however, suggested that this could be changed and that he could make the change retrospective so the money might go the Treasury. Which, it should be said, has spent billions bailing out banks and keeping the financial system afloat.
Q. What about the individuals who were involved ? Will they get off scot-free?
Not necessarily. The FSA has the power to penalise individuals as well as companies, and this is likely to follow. Options range from reprimands, to fines, to bans from working in the City. It can't prosecute in this case, however. Libor rates don't qualify under its market abuse regime. The Serious Fraud Office has greater powers, but it may have its work cut out. Overseas authorities may have the option of prosecuting, so if the SFO won't act, the US Department of Justice might.
Q. Who's next?
That's the big question. The regulators are looking carefully at other banks and their submissions to Libor. All the other big UK banks – Royal Bank of Scotland, HSBC and Lloyds – will say is that they are co-operating with the authorities. But the Chancellor has confirmed that the first two are under the spotlight.
Q. And what's next for Barclays?
More bruises. And potential resignations, if not now then in the weeks that follow.
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