Barclays in Rate Rigging Scandal

by Mark Johnston

It has emerged this week that Barclays is under investigation as US and UK regulatory bodies probe suspected improper conduct in an alleged rigging of the benchmarking of the interbank lending rate.  This rate, the LIBOR, is used as a reference point for $350,000 billion in financial products.

The London Inter Bank Offer Rate (LIBOR) has a direct impact on some mortgage rates applied to borrowers.  The LIBOR is an interest rate, used on a daily basis, at which banks borrow unsecured funds from one another in the wholesale money market in London.  Another way of looking at this can be to imagine that this rate is the interest rate that the banks offer to pay each other for the loans they borrow from each other for various different time periods and in various different currencies.

Prior to the credit crisis, which reduced the general availability of loans (or credit), over the last few years some mortgage lenders had been offering tracker rates linked directly to the LIBOR.  An odd notion but one that benefited the borrowers significantly when this was lower than the Bank of England base rate at the time.  So, the allegation that Barclays colluded with other lenders and banks to fix this rate, is quite serious for borrowers.

The alleged misconduct was apparently carried out between 2006 and 2008 and centres around the violation of the “Chinese wall” rules which prohibits and should prevent information being shared between different parts of the bank, in this case between the traders and the banks treasury arm.

Barclays are not alone under this joint Atlantic coalition investigation; Citigroup, UBS and Bank of America have also received subpoenas.  Bank of America is no stranger, these days, for investigations into unprofessional conduct.

A Federal District Court judge in the USA has recently endorsed the continued prosecution of the Bank of America by the German Deutsche Bank AG and the French mortgage lender BNP Paribas SA.  Their issues are broadly relating to the losses that they incurred through the collapse of Taylor Bean and Whittaker Mortgage Corporation.

This latest probe, believes that the banks involved knowingly understated the LIBOR rates thereby reducing borrowing costs and capping investor panic.  When artificial LIBOR is entered into the market, this inevitably leaves lenders and investors out of pocket but this is good news for borrowers, interbank and via LIBOR mortgage rates which track these.

The LIBOR, in early 2009 was on the decline, meaning lower rates for borrowers tracking this indicator.  However, in the last year the LIBOR has increased considerably and outstretched the current Bank of England base rate of 0.5 per cent.  The LIBOR currently sits at 0.8 per cent which makes this rate the less attractive of the two tracker options.

The British Bankers’ Association (BBA) has defended its rate setting process and the controls that they have in place.  In a BBA statement they claim; “We observe rigorous standards in our scrutiny and governance of the Libor mechanism, and work with the industry to ensure their continued full confidence in one of its most accurate and reliable benchmarks.”

Investigation continues.

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