Monday, 3 September 2012

The LIBOR rate scandal - Is Barclays solely to blame?

by Karina Shooter

On Friday, Barclays announced that Anthony Jenkins would be Bob Diamond's successor as CEO. It seems that months after the LIBOR scandal broke out, Barclays is still the only bank whose public reputation is being destroyed - Barclays shares have plummeted by over half compared to its peak rates before the scandal. But is Barclays solely to blame for fixing the LIBOR rate? 

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Barclays shame: Boss Bob Diamond has given up his bonus after the bank was hit by a £290m fine. Picture courtesy of

The LIBOR rate is one of the most important numbers in finance. It is used to calculate an estimated $800-trillion worth of financial instruments. It not only dictates the rates of commercial products such as variable rate mortgages and term loans but also standard interbank products such as future interest rates and interest rate swapping. The LIBOR rates are calculated for 10 different currencies and 15 borrowing periods (ranging from overnight to a year) and are published daily at 11.30am (GMT).  A group of the biggest global banking firms are responsible for the calculations. Each bank estimates the average interest rate that they would be charged if borrowing from other banks. The top four and bottom four are then discarded and then the LIBOR rate is the average of what is left. 

Barclays have been accused of fixing the LIBOR rate in two ways. The first was when traders pushed their own money-market desks to doctor submissions for LIBOR - there have been reports of traders casually shouting across the trading floor that they wanted to fix LIBOR, to see if they had any other competing offers. In addition to this, traders were also colluding with their counterparts at other banks, making and receiving requests to pass on to their LIBOR submitters. All of this was purely to boost the traders' own profits.

The second type of LIBOR rigging was not done for Barclays own benefit, but more for 'public good' which has started a debate as to whether this type of fixing is morally justifiable. During the financial crisis, the submission of a high LIBOR rate gave the impression of financial weakness. A twist in the LIBOR scandal is that Barclays has produced a document which implies that the deputy governor of the Bank of England, subtly gave them permission to drop their LIBOR rate estimates, to give the public the impression of a more stable banking economy. This document takes the form of a memo, written by Bob Diamond (then Barclays' CEO) after a call with Paul Tucker (then a senior official at the bank of England). It said that Tucker had flagged concerns from senior figures in Whitehall as to why Barclays was always towards the top end of LIBOR pricing and that it did not always need to be the case that they appeared as high as they had recently. The next day Barclays LIBOR rate submission was lower.  In his defence, Bob Diamond said that Barclays tried to calculate their submissions so that it was low enough not to cause concern, but high enough so that it was discarded as part of the top four submissions, therefore it did not effect the average that makes up the LIBOR rate. His message is clear - other banks who were entering lower submissions were clearly fixing the LIBOR rate more severely than Barclays were.

In my opinion Barclays is being made an example of and is the first to be publicly blamed for the LIBOR scandal because it offered to co-operate fully with regulators. In fact, many of the biggest names in finance are being investigated including the likes of Citigroup, JPMorgan Chase, UBS, Deutsche Bank and HSBC. Investigations are not just happening in the UK, but also America, Canada and Europe. The banking industry needed to pin the blame on someone, but they would prefer the public to lose faith in one bank rather than the whole banking system. The fixing of the LIBOR rate and other similar rates such as EURIBOR is a global issue which Barclays should not take sole responsibility for. 

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1 comment:

  1. I really like your article, Karina! I completely agree with your opinion that Barclays is simply the unfortunate bank that the blame is being placed upon, but it is not the only bank at fault. This is one of the really interesting things about economics, I think - the fact that the public psychology and their beliefs make so much of a diffenece to the economy becuase those factors massively affect consumption. Obviously the governing bodies know that and have therefore only shown one bank as being majorly at fault rather than confessing that it might be a bigger problem.


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