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Adam Aiken, Editor
Wednesday, July 4, 2012
Forget MPs’ expenses and the Leveson inquiry. The good old bankers have returned to the top the table with the latest scandal – one that threatens the integrity and public perception of the entire banking system.
We’ve already had the near-collapse of Northern Rock, the meltdown of the global investment-banking system, the bailing out by the taxpayer of some of our largest banks, and the recent IT fiasco at Royal Bank of Scotland and Natwest.
Now Barclays – one of our leading banks – has been caught in the middle of a scandal over Libor.
It might sound like a lot of fuss about a technicality, but the issue could affect hundreds of thousands of people – and the bad behaviour could well have involved many other banks.
WHAT IS LIBOR?
Nearly 20 banks report their borrowing costs every day, and the average of these figures is called Libor, which stands for “London interbank offered rate”. It is the cost that banks face for borrowing from each other.
WHAT DID BARCLAYS DO WRONG?
The bank regularly misreported the rate it was being charged to borrow from its peers.
To start with, some bankers inflated the rate in a bid to make bigger profits.
Later on, it seems that Barclays reported artificially low figures because it wanted to be seen as a bank that was in good health while others around it were struggling.
In both cases, traders at Barclays were lying about what it was costing the bank to borrow.
WHEN DID ALL THIS HAPPEN?
The rate-rigging happened between 2005 and 2009.
SO HOW DOES THIS AFFECT ME?
Libor is used when banks lend to consumers. Many people assume that the Bank of England base rate is the figure that has most relevance to mortgages, but mortgages, in particular, are often linked to Libor.
A number of high-street lenders have raised the cost of home loans over recent months, and they often cited rising Libor as the reason behind the rate changes.
However, it is not necessarily the case that the false numbers posted by Barclays affected borrowers negatively. When the bank artificially recorded low borrowing costs to help to keep Libor down, this could have meant cheaper loans for customers.
It is thought that a quarter of a million mortgages are directly linked to Libor, with many more indirectly affected.
WHAT ABOUT WHEN THE RATE WAS ARTIFICIALLY HIGH?
It is going to be hard, if not impossible, to trace all the potential victims of rate-fixing.
It is much more complicated than other banking problems. With the ongoing account problems at Natwest, for example, it is easy to find out if you are a victim – if a bill payment bounces incorrectly, you know you have been caught up in the mess.
But Libor is just one factor taken into consideration when someone applies to a bank for credit.
It is difficult to say whether any individual would have been given more credit, or on better terms, had Libor been lower at any given point several years ago.
IS THIS JUST A BARCLAYS PROBLEM?
We will have to wait and see, but it would be surprising if this manipulation – which seems to have been carried out easily and at will – did not happen elsewhere, too.