Libor – the London Interbank Offered Rate – is the average cost of borrowing at which Britain’s banks lend each other money.
It is calculated daily, based on information supplied by those banks and is used worldwide as a benchmark for prices on trillions fo euros worth of derivatives and other financial products.
After the financial crisis, the Libor rate also was seen as a guide to the health of bank’s balance sheets.
Barclays manipulation alone could not have had a big effect on the final rate, but the suggestion is a lot of the big banks were doing the same thing.
And the Libor rate has an effect on the real economy as Tony Greenham, Head of Finance and Business at the New Economics Foundation, explained: “That average is what drives the interest rates paid by hundreds of millions of people on their own mortgages, small business on their loans, student loans, insurance products. It affects a hugely diverse range of financial transactions globally, not just in the UK.”
Britain’s central bank, the Bank of England, is trying to avoid being dragged into this scandal. It has denied it knew about Libor manipulation and was allowing it to happen.
“It is nonsense to suggest that the Bank of England was aware of any impropriety in the setting of Libor,” a BoE spokesman said. “If we had been aware of attempts to manipulate Libor we would have treated them very seriously.”
Barclays said it submitted artificially low estimates of its borrowing costs because it thought rivals were doing the same, and higher submissions would make it appear to be in trouble.
Barclays is the first bank to settle in an investigation which is looking at more than a dozen other banks, including Citigroup, HSBC, UBS and RBS.
HSBC said that as a bank that contributes to setting the Libor interest rate it was providing information to authorities, but the Financial Services Authority said it was not investigating HSBC.