Like many people, CoreData Research has been somewhat slack-jawed at the recent goings-on in the square mile of London with the scandalous fixing of LIBOR, the London Interbank Offer Rate.

Just when we (read “a few of us”) were thinking of extending a little trust to the international banking system that took us to the brink of the unimaginable in 2008, they come up with this!

Why should we care? Simply put, LIBOR is a benchmark for interest rates all around the world and many financial institutions mortgage lenders and credit card agencies set their own rates relative to LIBOR.

Clearly, LIBOR rates (set daily, one week, one month, two months, six months etc.) impact each and every one of us; savers, credit card users, and mortgage holders to name a few.

A CEO of one multinational bank has referred to the scandal as the banking industry’s “tobacco moment”, referring to the lawsuits and settlements that cost America’s tobacco industry more than $200billion in 1998. “It’s that big, ” he said.

As many as 20 big banks have been named in various investigations or lawsuits alleging that LIBOR was rigged, including Deutsche Bank, RBS, UBS, Citi and JPMorgan Chase who have all disclosed their involvement.

So, how did it happen and what went wrong? Perhaps it’s appropriate to start with how LIBOR is set. In short, each of a panel of banks submits its estimate of the rate that they would need to pay to borrow from another bank. Of these twenty estimates, the bottom four estimates are dropped, the top four similarly and the average of the remaining 12 is the LIBOR for the borrowing period in question. Sounds simple enough, and in the past, it possibly was.

Today however the scandal has thrown up a number of ways that the fixing has occurred;

  1. Derivatives traders from a number of banks trying (and most likely successfully) influencing LIBOR in order to increase profits or minimise losses on their derivative books
  2. During the financial crisis, dishonestly low estimates of borrowing costs were submitted by a number of banks which meant these banks were not attracting the gaze of the markets by confessing to the high price they would have to pay to borrow if they could borrow at all
  3. By engaging in collusive behavior or in knowing how some banks were behaving in their estimation process, banks stood to profit from knowing the likelihood of the rate to eventuate over any time period.

However, will this be the banking industry’s tobacco moment? It certainly isn’t proving to be happy times for Barclays boss Bob Diamond who has quit the bank and is now embroiled in a bitter battle to save his reputation as he accuses the Bank of England of asking him to fix the LIBOR.

The scandal is unfolding daily, so we will look to provide a Burning Pants update as the scandal unfolds.

We aren’t sure what will happen next, but we do know this is another ill-timed event that will do nothing to instill confidence and trust in the global banking system.


Leave a Response