1) What are Libor and Euribor?
Libor, the London Interbank Offered Rate, is the rate at which banks borrow money from each other across 10 major currencies and 15 borrowing periods, ranging from overnight loans to 12-month loans, according to the British Banking Association. Libor was devised in the 1980s as demand grew for an accurate measure of the rate at which banks would lend to one another.
Every day at 11am in London, banks send their interbank borrowing rates to Thomson Reuters. Reuters shaves off the highest and lowest contributions and works out an average rate using the rest. It does this 150 times to create the daily Libor rate, which is published at 12pm.
Euribor, the Euro Interbank Offered Rate, calculates the rate at which 57 European banks lend euros to one another, also across 15 borrowing periods, according to www.euribor-rates.eu
2) Why would a bank fix its Libor rate?
Many of the assets in traders’ portfolios were priced off Libor. Depending on what assets were in the portfolio, and the risks they were therefore running, traders might have benefited from a higher rate, a lower rate or a greater disparity between two different rates (either different durations or currencies). The FSA evidence appears to show traders lobbying for Libor rates to be skewed in such a way that would benefit them as the contracts in their portfolio reached maturity or were due to be rolled over.
Also, according to the FSA final report, during the financial crisis Libor submissions were seen by some commentators as a measure of banks’ ability to raise funds. The report said that Barclays was identified in the media as having higher Libor submissions than other banks at the start of the crisis, which led the media to question whether it had liquidity problems. This bad publicity apparently worried Barclays senior management at high levels.
The FSA said: “Senior management’s concerns in turn resulted in instructions being given by less senior managers at Barclays to reduce Libor submissions in order to avoid negative media comment. The origin of these instructions is unclear.”
3) Would any business line be negatively impacted?
It all depends on the interbank rates. Derivatives traders at Barclays, and banks generally, enter into interest-rate swaps as counterparties to their clients. Payments due under these swaps hinge on benchmark rates including Libor and Euribor. Therefore, Barclays derivatives traders could either book a profit or a loss, depending on movements in these rates. The FSA said in its report: “For example, derivatives traders may have benefited if the spread between the three month and six month Euribor rates was narrow.”
4) How does Libor-fixing affect the man on the street?
Today, Libor is the basis for a huge range of financial instruments, from complex derivatives to mortgages and investments for Joe Bloggs. Homeowners typically pay a fixed interest rate on their mortgages or a 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 manipulated downwards, homeowners would have ended up paying less. In this case it would be investors that suffered. It will be hard to prove one way or the other whether the general public suffered or benefitted in aggregate from the activities of the banks.
5) Why are the US regulators involved?
The US financial regulator, the US Commodity Futures Trading Commission, said yesterday that Libor is used as a key rate all over the world, including the US, and Barclays engaged in “serious unlawful conduct”.
David Meister, the CFTC’s director of enforcement, said: “The American public and our markets rely upon the integrity of benchmark interest rates like Libor and Euribor because they form the basis for hundreds of trillions of dollars of transactions and affect nearly every corner of the global economy.”
6) Across which other time zones did this fixing take place?
The CFTC found that Barclays traders in New York, London and Tokyo asked their Libor submitters to submit particular rates to benefit their own derivatives trading positions, including swaps and futures positions, which were priced on Libor and Euribor.
7) Could other banks be fined?
Libor cannot be set by one bank alone; the rate takes into account submissions from a number of banks.
The FSA issued a stark warning in its final report: “The FSA continues to pursue a number of other significant cross-border investigations in this area and the action we have taken against Barclays should leave firms in no doubt about the serious consequences of this type of failure.”
Former traders at other banks have spoken out about a widespread culture of taking requests from clients to adjust rates. Tan Chi Min, who is suing the Royal Bank of Scotland for allegedly wrongly firing him, said in papers filed with the Singapore High Court in March that it was “common practice” among RBS traders to fix Libor rates.
8) Could anyone be arrested?
Media reports suggest that arrests have already been made, as well as suspensions. No further details are available at present.
9) How safe is Diamond’s job?
The calls for heads to roll came as soon as the fine was announced. Diamond has been under pressure this year already over his bonus, and he has forfeited his bonus for next year. Parallels can be drawn between Diamond and his equivalent at JP Morgan, Jamie Dimon. Following the trading scandal that engulfed JP Morgan in May, Dimon faced calls to resign but defended himself in front of the US Senate Banking Committee in June. He told senators that he was aware of trades made on a credit default swap index called CDX IG 9, but did not approve them. Since then, the media heat has died down and Dimon is still running JP Morgan.
According to a Financial News poll taken at 12pm, 63% of readers think Diamond will be CEO of Barclays for a while yet, largely because other banks will be fined and this will take the heat off him. Fourteen percent think he will be gone within a week.
10) Are there alternatives to Libor?
Today, the BBA said it will ask the UK government to consider regulating and supervising how Libor is set. The BBA announced in March this year that it was reviewing how Libor is set, including enforcing a “rigorous code of requirements”. The consultation is being led by an industry steering group of banks and those that use Libor.
–write to farah.khalique@dowjones.com
• This article was modified at 15.15 BST