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Liebor? — Determination of the LIBOR must be above suspicion.
August2012
Liebor? — Determination of the LIBOR must be above suspicion.
By Tarunkumar Singhal, Raman Jokhakar, Chartered Accountants
Reading Time 2 mins
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The scandal involving the London Interbank Offered Rate (Libor) — which serves as a benchmark for determining the rate of interest on a great many financial transactions — has already cost Barclays, the UK’s third-biggest bank, dear. It has been fined nearly half-a-billion dollars and lost three powerful men at the top, including CEO Bob Diamond. But the damage to date may be only the tip of the iceberg. If a 2008 internal memo published by Barclays is to be believed, manipulation and subterfuge are not the exclusive preserve of banks. The rot goes much deeper. Barclays, so it would seem, was only taking its cue from the Bank of England and the government. Both wanted to keep interest rates low to stimulate economic activity in the aftermath of the 2008 crisis.
What better way to do that than have friendly banks deliberately under-report the actual rate of interest in order to depress Libor, the market benchmark used to price financial contracts, globally? If true, the implications are much more serious and go well beyond the UK. Allegations of Libor rigging are not new.
For now, Barclays’ claim that it had official sanction to manipulate the rate and report it lower during the crisis has not found many takers. But there is no denying that after the collapse of Lehman Brothers when banks’ borrowing costs increased dramatically, managers and governments were keen to shore up confidence, tempting banks to present a rosier-than-actual picture by reporting lower-than-actual interest rates. There is also no denying the nexus between Western governments and banks.
Most US Treasury Secretaries have cut their teeth on Wall Street. But the Barclays scandal shows the nexus could potentially be wider and far more damaging than suspected so far. Libor determines the interest rate on transactions to the tune of close to INRNaN trillion globally. Like Caesar’s wife, it must be above suspicion.
