One of the year’s bigger financial scandals was that Barclays bank (and others) had been manipulating the Libor to flatter the true financial position of the bank or to advantage its traders. The affair saw Barclays fined a record £290 million by authorities in the UK and the USA. The Libor rate is set as an average value (stripped of the highest and lowest rates) of the rates at which banks are prepared to lend to each other. It has a wide impact involving key currency rates, business loans, mortgages and even student loans – one key value is the Libor 3-month rate.
To put this in perspective, it is estimated that Libor influences $800 trillion worth of transactions – a figure which is more than 12 times the gross domestic product of the entire world. It represents something like $110000 per man, woman and child on the planet, given that the global population is roughly 7 billion souls. It also serves to put the Greek financial crisis into its proper perspective.
At the moment, Libor is the responsibility of the British Bankers Association (BBA) and the body acknowledges that it may have to relinquish responsibility for the rate in the light of an investigation by the UK bank regulator, the Financial Services Authority (FSA). Rather than the somewhat informal process of asking major banks to provide information to set Libor, it may well be that the rate is set on actual data (which many people would have assumed to be the case for decades), in order to shore-up confidence in the financial sector. It is also likely that Libor will fall under specific new regulation as a result of the report.
The UK banking sector is licking its wounds over its less than saintly role in mis-selling of payment protection insurance and inappropriate interest rate swaps (derivatives) to small businesses.