6 Feb 2013

Libor rate-fixing scandal – the key questions

RBS is the third bank to be fined for attempting to fix the benchmark lending rate for financial institutions. What did these banks do and why does it matter?

RBS is the third bank to be fined for attempting to fix the benchmark lending rate for financial institutions. What did these banks do and why does it matter? (Getty)

RBS will have to pay a penalty of almost £400m after reaching a deal with British and US regulators.

What is Libor?

The London inter-bank offered rate (Libor) is supposed to give an indication of what banks expect to pay to borrow from one another.

It is used as a reference price for well over $300tr worth of loans and transactions around the world, including corporate loans and fixed-rate mortgages.

This staggering sum is several times more than the world’s entire output (GDP).

Who sets it?

Libor is set every day by panels of banks, overseen by the British Bankers’ Association (BBA) and calculated by Thomson Reuters.

Banks submit their individual figures, which are added up and divided to make an average, which becomes the Libor rate.

Following the Libor scandal, the BBA has agreed to hand over its responsibilities to another organisation.

See Jon Snow interview the head of the BBA about banking oversight and the Libor scandal

Which other banks have been fined?

Barclays was the first bank to be fined for attempting to manipulate Libor. It paid a penalty of £290m, levied by authorities in Britain and the US.

Swiss bank UBS was fined £940m by regulators in Britain, the US and Switzerland.

What did these banks do?

In the midst of the 2008 banking crisis, the banks stopped lending to one another.

There was concern that Barclays was submitting higher rates than others and that this could be a reflection of financial ill-health.

In response, Barclays lowered its submissions, giving the impression that its finances were in a better state.

At UBS traders bribed and colluded with brokers. At least 45 individuals, including traders, managers and senior managers, were involved in, or aware of, the practice.

There were at least 2,000 requests for inappropriate submissions, and attempts were made to manipulate Libor submissions at other banks by making corrupt payments to brokers.

RBS traders colluded with brokers and staff from other banks to influence its Libor submissions and the submissions made by other banks.

Did anyone lose their jobs?

At Barclays, chief executive Bob Diamond and chairman Marcus Agius resigned.

Eighteen UBS staff have been sacked.

The head of investment banking at RBS, John Hourican, is stepping down, even though he is not implicated in the affair.

Investigators found that 21 RBS employees had been involved in wrongdoing; those responsible have now either left the bank or been sacked or disciplined.

Are other banks involved?

Around 20 financial institutions across the world have been investigated for possible Libor manipulation.

In August, RBS, Barclays and HSBC were among seven banks handed legal notices demanding that they assist in an inquiry by the attorneys general of New York and Connecticut.

Could I have been affected by Libor manipulation?

The Financial Services Authority says the impact of manipulation “is likely to be minimal” for the average consumer. This is because financial products, including mortgages, are usually pegged to the Bank of England base rate, rather than Libor. Even products pegged to Libor would only be affected if this link was to the particular currency concerned at a specific time – a big if.

In addition, Libor submissions from Barclays, UBS and RBS staff were manipulated upwards and downwards, theoretically making financial products more expensive or cheaper, but by a minimal amount.

If the person on the street is not affected, why does it matter?

The FSA says the Libor rate is used to determine payments by big financial institutions, small businesses and public authorities and “is fundamental to the operation of both UK and international financial markets”.

The Libor scandal lifts the lid on what has been going on at banks over several years, with regulators in Britain and the US aware there was a problem some time ago.

If these sorts of submissions cannot be trusted, it does not bode well for the banks or the global economy.