Barclays has come under fire recently for trying to manipulate a key bank lending rate. The bank was fined a staggering £290 million ($450 million) for doing so. This is the single largest fine in history against a banking institution by the central UK financial regulator, the Financial Services Authority (FSA).
This internal lending rate has a knock-on effect on interest rates offered to consumers on a range of financial products including mortgages, credit cards, loans and other rates.
In addition to trying to manipulate the rates, Barclays was also found guilty of lying about other figures. This could have had a serious impact on what other banks and lenders offer to consumers, especially mortgages. Buy-to-let investors, private bank clients and borrowers with poor credit histories might have had their mortgage payments affected by this scandal.
Industry watchdog, the Financial Ombudsman Service, has said that it is unlikely that consumers would see any compensation despite the widespread scale of the scandal.
Here is a brief guide as to why this has happened and how you are affected:
Why do banks lend to each other?
Barclays has been found guilty of trying to fix one of the key lending rates. The rate of which it would have lent money to other banks may have been higher, which may have pushed up the rates that consumers have to pay. Banks typically lend to each other on a short-term basis to make a profit or to cover any short-term cash shortfalls.
This means that should a bank find that a larger number of customers withdrew funds rather than make deposits, they will borrow from rival banks to make up the shortfall. They borrow at a rate known as the London Interbank Offered Rate (Libor) which is only used between banks in the UK. This is known as interbank lending and is the average rate of interest paid by banks to other banks for borrowing money.
Why is Libor important?
Libor is used to measure the lending interest rate, which is how much banks have to pay on what they borrow from their competitors.
This rate is calculated on a daily basis by the British Bankers Association (BBA) based on estimates that are submitted by the major banks on the cost of their own interbank lending.
The rates given are a reflection of how financially strong the banks think they are. The major 16 banks submit the interest rates they will charge other banks to borrow money. The higher the interest a bank has to pay, the less confidence the lending bank has in that borrowing bank.
Libor and Euribor (which is the European equivalent) are ‘benchmark’ references rates which are fundamental to operations in the UK and the international financial markets, according to the Financial Services Authority.
Trillions of financial transactions and prices are made everyday across the country and are set according to Libor.
Barclays and the Libor scandal
It has been discovered that Barclays had been submitting misleading figures and staff at the bank had regularly filed incorrect figures between 2005 and 2008. Sometimes they had been working in conjunction with traders at other banks to influence the Libor rate in a bid to boost profits.
The FSA and their counterparts at the Commodities Future Trading Commission and Department of Justice in Washington found that staff at the bank had also manipulated figures to make them deliberately low during the peak of the recession through 2007 and 2009. This was done to disguise the financial difficulty that Barclays was having during the economic downturn.
The Libor scandal is said to be significantly bigger than the recent payment protection insurance scandal which several banks were embroiled in last year.
As a result, the FBI has begun an investigation into 14 Barclays traders who were largely based in London and New York.
Tracey McDermott, FSA acting director of enforcement, said: “Barclays’ misconduct was serious, widespread and extended over a number of years.”
Barclays are the not the only bank being accused of trying to rig the rates. The Royal Bank of Scotland, Lloyds Banking Group and UBS Citigroup are also facing investigation for their part in Libor manipulation.
How does this affect you?
Any changes to the main rate could trickle down the financial system to influence the price of loans, mortgages and credit card rates. This could make them cheaper or more expensive depending on the Libor rate. The move to try and influence the rates is thought to have already impacted 250,000 UK borrowers whose loans are directly linked with Libor.
Consumers, however, will have a tough time trying to work out if they have suffered a loss as a result of their banks’ actions. Barclays claims that its own customers would not have been affected, however, a number of financial institutions use Libor. As the rate changes everyday, it could be hard to measure if Barclays was successful in doing so. It might be easier to judge whether those on fixed-rate mortgages would have suffered as a result; but only time will tell.