What is Libor?
Libor is short for the London InterBank Offered Rate. It is the price at which banks estimate their rivals will want to lend to them – and with trillions swashing around the banks, it has a sizeable impact.
So it’s a bank thing then.
It is a global benchmark interest rate that impacts on deals worth around £290,000,000,000,000 setting borrowing rates for businesses and consumers all around the world. Crucially, it is also an indication of the amount of trust banks have in their rivals’ financial health.
That’s why it was so important in the credit crunch when banks were shopping around for someone to lend to them to maintain their liquidity. The higher the rates offered by a bank, the riskier its standing seemed – crucial for confidence at the height of the 2008 crash which saw a run on Northern Rock.
How is the Libor set?
Every day a group of banks submits the interest rates at which they are willing to lend to each other and other financial institutions. They suggest rates in 10 currencies covering 15 different lengths of loan, ranging from overnight to 12 months. Then an average is calculated. This is based on trust and speculation rather than actual, tangible financial deals.
What was the scandal all about?
Bankers, including some at Barclays and HSBC, were manipulating the rates, disguising the true costs of borrowing paid by companies and households. Rival banks were conspiring with each other to set the rate higher or lower than the actual rate to make profit in speculations.
What did they actually do though?
In the case of Barclays, the City watchdog, the Financial Services Authority, also in Canary Wharf, found that Barclays had been making submissions that were intended to allow the bank to make profits when its traders speculated on interest rates.
An investigation revealed emails between Barclays staff offering bottles of Bollinger champagne for favours that would lead to bigger bonuses. Bankers also reduced the rates during the 2008 crisis in case the true rates were interpreted negatively by the market.
Barclays, for example, was fined £290million for its involvement, including the largest ever fine by the FSA of £59million. RBS, HSBC, Citibank, JP Morgan Chase and Barclays paid billions in fines for their involvement. Most recently, the UK operations of Deutsche Bank was fined £227million by the newly-branded Financial Conduct Authority for Libor failings, and for misleading the regulator.
Did anyone go to jail?
In August this year, Tom Hayes, a former UBS and Citigroup trader convicted of conspiracy to defraud, was jailed for 14 years. Other trials are ongoing.
What did the judge have to say?
Mr Justice Cooke sitting at Southwark Crown Court said: “The seriousness of this offence in the context of the Libor benchmark and banking is hard to overstate.
"High standards of probity are to be expected of those who operate in the banking system, whether they are bankers involved in dealing with deposits and the lending of money, or traders in an investment banking context. What this case has shown is the absence of that integrity which ought to characterise banking.”
Could it happen again?
Oversight of Libor was passed from the British Bankers’ Association to the Intercontinental Exchange. Rates are now based on actual transactions for which records are kept. There are now also criminal sanctions for manipulation of benchmark interest rates.