What is Libor?
Libor stands for the London interbank offered rate and is the benchmark for interest rates in the City. Sixteen banks are asked to predict what rate of interest they will be able to borrow at the next day. They send their predictions to the British Bankers Association (BBA), which publishes an average. Most attention is focused on the three-month Libor rate, which is normally about 0.15% higher than the standard base rate set by the Bank of England, but began to soar during the financial crisis as banks held on to capital.
Why does it matter?
Thousands of financial products are priced on the Libor rate because it is supposed to represent the real cost of money to the banks. In the same way that mortgage rates for first-time homebuyers are about 6% despite base rates being 0.5%, Libor can be much higher if enough banks are deemed risky and push up the average. Between the summer of 2007 and the end of 2008, Libor averaged more than 1% higher than the base rate. Euribor is the continental equivalent and has followed a similar pattern.
What did Barclays do?
The BBA publishes individual bank interest rates alongside the industry average, enabling the media and City traders to see if Barclays was suffering more than other banks. After Northern Rock went bust and there was a suspicion that Barclays was in trouble, a group of traders deliberately drove down the Libor rate. The lower the rate, the more it appeared that Barclays was healthy and able to survive the credit crunch. At other times, traders colluded with rival bank staff to make profits by driving up the interest rate.
How long did the practice go on?
The Financial Services Authority (FSA) says in its 40-page document on the affair that Barclays was involved in manipulating the rate from 2005 and stopped only in 2009. Managers in the division where they worked knew about the practice and compliance officers were informed. The FSA says its own staff were misled by Barclays during the four years of price-fixing.
Why did senior managers not act?
We don’t know. The FSA report does not give details of interviews with staff to reveal their motives. It says only that it believes the top brass at Barclays were unaware of the practice, despite senior managers below them knowing. Critics of the banks argue that the culture of the bank was buccaneering and risk-taking after chief executive Bob Diamond promised shareholders a quicker recovery from the crisis and higher profits than many analysts believed possible.
Were other banks involved?
Several banks are under investigation, including Citibank, Deutsche Bank and Royal Bank of Scotland. It is understood that many are facing questions about their conduct because Barclays informed on rivals as part of a settlement with regulators.