Tuesday 3 July 2012

LIBOR - who benefited?

LIBOR (London Inter-Bank Offered Rate) has existed for more than 30 years as a means for banks to set the reference rate of interest for variable rate loans such as syndicated loans to national and local governments, international bodies and major corporations.  In the 1970s, the reference panel comprised five banks.  The fixing was made at a set time each day, the top and bottom rates were disregarded and an average was calculated based on the remaining three, to set for example the three month rate for sterling loans.  Rates such as EURIBOR were set in a similar way. 

Today, the Sterling LIBOR reference panel has 16 banks, and the daily submissions are made to Thompson Reuters, which manages the process on behalf of the British Bankers' Association (BBA). 

The top four and bottom four rates are disregarded at each fixing.  So this means, even when its rate submissions were manipulated, that Barclays would have been in the disregarded eight unless at least four other banks were wider from the average than they were.  Barclays submissions would have no effect when they're outside the central zone, and therefore any manipulation that had a material impact must have been minuscule.

Here are the members of the Sterling panel, as shown on the BBA LIBOR site

Abbey National plcJP Morgan Chase
Bank of Tokyo-Mitsubishi UFJ LtdLloyds Banking Group
Barclays Bank plcMizuho Corporate Bank
BNP ParibasRabobank
Citibank NARoyal Bank of Canada
Credit Agricole CIBThe Royal Bank of Scotland Group
Deutsche Bank AGSociété Générale

Two reasons have emerged for manipulations: one is to enhance trading books, and improve reported profits for the traders involved; the other is to improve a bank's standing as reflected by apparent cost of funding. There are reports that this latter manipulation was encouraged by HM Treasury and possibly the Bank of England. 

Every bank has sophisticated systems to manage its interest rate risks.  They assemble live data from the bank's trading systems and should be used to derive the rate submissions for LIBOR. 

The Parliamentary Inquiry (if that's what happens) can demand a full history from each of the panel members and find out the exact nature of the attempted rate manipulation, the difference between actual and submitted rates, and find from the BBA whether the manipulated rate was included in the day's calculation.  Each bank should be able to identify its profit or loss from a successful manipulation, and any individuals that profited personally from manipulating rates.

We live in interesting times, and with good management and some careful legislative change, this scandal can be used to improve processes and accountability in the banking market.

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