We reveal how the rate-rigging scandal involving Barclays has harmed British consumers.
The past month has a nightmare for big British bank Barclays, its directors and shareholders.
Badly behaved Barclays
On Wednesday, 27 June, Barclays admitted that it had attempted to manipulate two key interest rates: Libor (the London Interbank Offered Rate) and Euribor (the Euro Interbank Offered Rate). As a result, the bank was fined £58.5 million by City watchdog the Financial Services Authority (FSA). By pleading guilty, Barclays got a 30% discount on what could have been an £85 million fine.
The wayward bank also paid a fine of $200 million to the US Commodity Futures Trading Commission, after admitting attempted manipulation and false-reporting charges. Also, Barclays paid a fine of $160 million to the US Department of Justice.
Overall, these three fines came to £290 million. Ouch!
Libor becomes Lie-bor
To understand how serious Barclays’ rate-rigging was, you first need to understand how important Libor is within the global financial system.
Libor is a key benchmark interest rate from which over $350 trillion of financial instruments and millions of financial contracts are priced. In effect, it determines the interest rates paid by consumers and companies for loans, as well as the rates some savers earn on their cash deposits.
Each day at 11am, a panel of banks submits quotes to the British Bankers’ Association (BBA) for borrowing in ten different currencies over 15 different time periods, ranging from overnight to one year. After discarding the top quarter (25%) and bottom quarter of banks’ quotes, the BBA issues each Libor ‘trimmed average’ at noon.
The three most important rates set by this process are three-month US$ Libor, Sterling Libor and Euribor. These are linked to three of the world’s leading currencies: the US dollar, British pound and the 17-nation euro.
What Barclays did
After the collapse of US investment bank Lehman Brothers in mid-September 2008, Libor rates soared as the banking system looked into an abyss. Unfortunately, Barclays’ daily submissions to Libor were consistently at the top of the rate ranges submitted, indicating that the bank was under severe stress.
Therefore, to take pressure off its lending costs — and to make money for its own interest-rate traders — Barclays made artificially low submissions to the Libor panel. As a result, it may have pushed down Libor a fraction, helping to reduce Barclays’ own borrowing costs, as well delivering profits to its in-house traders.
We now know that Barclays only attempted to manipulate US$ Libor and Euribor, not Sterling Libor. Therefore, financial instruments priced in pounds are unlikely to have been affected by Barclays’ rate-rigging.
What this means for Britain
This scandal has led to the resignations of Barclays chairman Marcus Agius and its US-born chief executive, Bob Diamond. Members of the Bank of England and FSA have also been dragged into this scandal. In short, it’s the biggest market misconduct of the past 30 years and perhaps longer.
But what does all this complicated market manipulation mean to the man in the street? Here are my views on the depth and breadth of this scandal:
1. Bank shareholders suffer
After this news broke, Barclays shares plunged 15.5% in 24 hours, closing the following day at under 166p. Since then, they have continued to slide and, as I write, trade at under 160p. With billions wiped from Barclays’ value, its shareholders have paid a heavy price for trusting the bank’s management.
What’s more, shareholders in other banks have been hit too, with shares in Royal Bank of Scotland the second-biggest fallers, down 11.5% in a single day. Shareholders in HSBC were least hurt, with shares in the global mega-bank falling by under 3% after this news broke.
Nevertheless, with up to 20 other banks being investigated by 10 different regulators on three continents, evidence of more bad behaviour –and, therefore, billions more in fines and lawsuits — will surely follow. These would hit bank shares and their owners (including private investors, pension funds and insurance companies) hard in the months and years ahead.
In short, when bank shares take a battering, we all share the pain.
2. Borrowers (consumers and companies)
Barclays admitted rigging Libor rates between 2005 and 2009, on hundreds of occasions and sometimes daily. However, during the global financial crash of 2007/09, Barclays tried to lower Libor rates, not to raise them. Also, it did not try to rig Sterling Libor.
As a result, it is incredibly hard to judge how much individual borrowers (those with mortgages, personal loans and credit cards) have gained or lost from this market manipulation. One thing we can say is that Barclays’ false submissions didn’t affect Sterling Libor. As a result, most UK borrowers — both individuals and companies — are unlikely to have lost out from this rate-rigging.
However, some UK companies, from the smallest to the largest, do borrow in US dollars, usually because they export to the US or receive a slug of their revenues in dollars. Likewise, companies with high euro exports and revenues do borrow in euros and may have been affected by the fiddling of Euribor.
According to US bank regulator the Office of the Comptroller of the Currency, recently quoted in the Financial Times, there are at least 900,000 existing US home loans linked to Libor that were issued from 2005 to 2009. Together, these debts alone total $275 billion (£176 billion).
Hence, it’s entirely possible that these borrowers could go after Barclays and other naughty banks in the UK, US or European courts. Likewise, American and European mortgage borrowers and bank investors could launch class-action lawsuits against these badly behaved banks. Were these lawsuits to be successful, then the payouts could run into tens of billions.
3. Savers
As I’ve already explained, it’s not yet possible to say how rate-fixing has harmed households. Indeed, some borrowers may have benefited from rate-fixing by paying below-market rates. However, when Libor rates were forced downwards, savers in the US and Europe will have earned lower rates. Again, while few UK savers are likely to have lost out, overseas victims could run into the millions.
4. Bank customers
With banks’ reputations already in the gutter, this news is merely the latest in a long line of banking scandals, all of which undermine Brits’ confidence in our banks. As a result, applications to switch banks have soared since this news broke.
For instance, ethical, small and respected banks have seen a stream of new applications in the past three weeks. This ‘surge in switching’ has also been swelled by ongoing computer problems at RBS, NatWest and Ulster Bank, with customers unable to use their current accounts for days.
Hence, the likes of Nationwide BS, the Co-Operative Bank and new bank Metro Bank have all reported a strong rise in new applications from fed-up account-switchers.
A global financial fix
In summary, the banks’ manipulation of Libor amounts to a fraud on bank customers around the world, from individual savers to the largest corporate borrowers. Thus, this scandal won’t just vanish and is set to last for many years to come.
Indeed, with the Serious Fraud Office now investigating Libor-rigging, some bankers could eventually end up behind bars!
