Rigging the Rates – The Contagion Effect of Barclay’s Libor Scam
Posted by Fsokx, 26 July 2012 · 1,849 views
Barclay Libor Issue Financial Market Rates Banks
Barclays’ recent Libor (London Inter-Bank Offer Rate) scandal has revealed the ability of big banks to fix the index or benchmark rate. Libor is the main index banks use for borrowing and lending purposes and includes a series of rates set daily by a group of international banks in London. It’s the base for the loans, securities, and derivatives market worth USD 550 trillion. Barclays was fined USD 453 million by British and the U.S. authorities for manipulating the Libor rates from 2005 until 2009.
Authorities uncovered a trail of emails, messages, and phone calls in which Barclays’ treasury office submitted optimistic estimates of their borrowing costs to the British Bankers’ Association. These communications clearly depict Barclay’s mistreatment of its costs to elevate its stature during the peak of the global financial crises. The bank tailored its Libor figures to meet the needs of its trading arm rather than provide accurate estimates. It is feared that many other banks and financial institutions have submitted devious estimates of their borrowing costs as well, thus distorting the entire structure of global interest rates.
The scandal has not only led to the resignation of some of the bank’s top executives, but the S&P also downgraded Barclay’s credit rating to negative. In light of the Barclay’s debacle, serious concerns remain about other giant banks and financial institutions that may have used regulatory loopholes for their own interests. In addition, investors lost faith in the integrity of the markets and are pulling back.
The scandal demonstrates that bank’s lending activity has become a sideshow business instead of fulfilling its real purpose. Consequently, many analysts are worried about the scandal’s contagion effects on the market as they estimate a long-term decline in trading volumes. Since the global financial industry is already embroiled in a severe crises, Barclays has just added more fuel to the fire.