If you open a newspaper or turn on your television, you are once again bombarded with headlines on yet another banking related scandal - this time LIBOR rate fixing. With the resignation of Barclay's chief executive and more revelations in relation to rate fixing practices by the major banks you may be wondering what it's all about, and how it affects you.
- What is LIBOR?
The current issues surround the LIBOR interest rate. This is the average rate at which the major banks confirm that they will lend to each other. It is fixed daily, with the British Bankers Association asking members of its panel to submit the lowest rate at which they would be able to borrow from other banks. There are 16 banks on the panel and an average of the middle 8 submissions is used to determine the LIBOR rate.
- What is rate-fixing?
The activities that have led to the problems at Barclays basically implicate the parties involved fixing a rate that would benefit their own financial positions.
- How does it affect you?
If the banks have a higher LIBOR rate, this cost is generally passed down to customers through increased repayments on loans. If banks are able to borrow from each other on a basis which they consider to be affordable, they are under less pressure to offer good deals to savers in order to improve their savings deposits. The applicable interest rate in many commercial loan agreements is a certain percentage above LIBOR. This means that the rate at which LIBOR is set has a direct influence on the level of repayments under loan agreements.
- Will there be legal action by those affected?
So far, regulatory fines have been imposed on Barclays and it is anticipated that many more of the major banks will incur the same sanctions. Criminal prosecutions have not been ruled out, and court actions are being filed in America by parties who held financial products linked to the LIBOR rate.
Unfortunately this is yet another blemish on the reputations of the large banks, in a climate where the average person is already tired of hearing about the questionable nature of the culture in the banking sector.
If you have any questions/concerns in relation to libor rate fixing or think you may have been adversely affected, please contact us.
