LIBOR in the News: What it is, Why it's Important
With Barclays making headlines across the world for manipulating the 'LIBOR' rate, the question most of us want to know is 'how does this affect me?'. The first thing you need to understand is that although the Bank of England in the UK and Fed in the US set the base bank rate, when you apply for a loan or mortgage the rate you pay is not based on these currently very low rates, but more generally on the London Interbank Offered Rate or LIBOR.
The LIBOR is the world's most widely used benchmark for short term interest rates. The definition of LIBOR (according to Investopedia) is 'an interest rate the banks can borrow funds, in marketable size, from other banks in the London interbank market'. This rate is fixed daily by the British Bankers Association (BBA). In actuality between ten and sixteen banks agree this rate between them and your loan is based on that rate and not the current Bank Base rate set by Governments. This reference rate is used by banks across the world not just those in London, so bankers in the US, Canada, Switzerland and across Europe use it in calculating the cost of money to you and I.
The British Bankers' Association, which compiles Libor, askes for a rate submissions but there were no checks. Back in 2008 at the height of the credit crunch traders were lowering the price a few basis points each day to make their bank look better than it actually was at the time.
The Financial Services Authority is the banking sector regulator in the UK and their own documents reveal that on April 17, 2008, a senior Barclays manager told the watchdog "that Barclays had been understating its Libor submissions", admitting that the bank was not "clean clean, but clean in principle". Barclays explained that it was concerned other banks were fixing the rate and its honesty was making it vulnerable. The FSA, led by chief executive Hector Sants, defended its lack of action by arguing that Barclays had not properly disclosed the degree of its own Libor manipulation at the time.Continued on the next page