What are its implications on the global financial markets?
Libor, the London Interbank Offered Rate, is the rate at which banks borrow money from eachother across 10 major currencies and 15 borrowing periods, ranging from overnight loans to 12-month loans, according to the British Banking Association.It matters because lots and lots of deals involving clients of Barclays used the interest rate intowhich Barclays was feeding this information, about its own borrowing costs, to determine theprofit and loss on their own deals.Libor is the basis for pricing over $10 trillion of loans.
Barclays’ submissions would have had a tiny affect on the final Libor readings. But because
those Libor readings are used to price hundreds of trillions of pounds of debt stock, the smallestchange has enormous implications. Whether Barclays overstated or understated Libor, it wouldhave meant a financial counterparty paying more or receiving less than they should have done.Those costs would have seeped through to the real economy
where households and companieswould have picked up the tab. For companies, whose loans are often priced straight off Libor, thecost of a deliberate overstatement would have been clear.
Who benefited, Who lost..?
For Common Man
Today, Libor is the basis for a huge range of financial instruments, from complex derivatives tomortgages and investments. Homeowners typically pay a fixed interest rate on their mortgages ora floating rate. Banks usually charge floating-rate mortgage payments as a certain percentage,
say 0.5%, above an established rate which could be the Bank of England rate, the bank’s own
borrowing rate or Libor. If Libor was being manipulated upwards, this would have pushed up
homeowners’ payments but equally, if Libor was manipul
ated downwards, homeowners wouldhave ended up paying less. In this case it would be investors that suffered. It will be hard toprove one way or the other whether the general public suffered or benefitted in aggregate fromthe activities of the banks.
Negative impact on business line
It all depends on the interbank rates. Derivatives traders at Barclays, and banks generally, enterinto interest-rate swaps as counterparties to their clients. Payments due under these swaps hingeon benchmark rates including Libor and Euribor. Therefore, Barclays derivatives traders couldeither book a profit or a loss, depending on movements in these rates.
“For example, derivatives
traders may have benefited if the spread between the three month and six month Euribor rateswas narrow."