Assessed blog 3 Barclay- Banking scandal

Assessed blog 3 Barclays- The manipulation of LIBOR rate in banking sector

          Welcome back to my blog! Last week, l was talking about the sub-prime mortgage crisis and the fall down of RBS by misleading of Fred Goodwin and other chief executives. L have found that the environment in banking area is quite complex and it is driven by many factors both inside the corporate culture and outside the economic tendency. It is quite fascinated me to get further research in UK bank area. Just after 5 years of financial crisis by the trigger of leman brothers, in 2012, another biggest banking scandal in UK has appeared.

Biggest banking scandal

          “Dude, l owe you big time! Come over one day after work and l am opening a bottle of Bollinger.” Said by an external trader to a Barclay trader. Beginning in 2012, an international investigation into the London Interbank Offered Rate, or Libor, revealed a widespread plot by multiple banks—notably Deutsche Bank, Barclays, UBS, Rabobank, and the Royal Bank of Scotland—to manipulate these interest rates for profit starting as far back as 2003.Barclays and banks from others countries are founded to manipulate LIBOR for making profits and lie to the public.

    

What is Libor? Why does it matter?

      At first, l do not quite understand what Libor is. Based what l learn, l thought it was just a rate which relate the loans bank making to each other. When l do some further studies, l find that it is not the easy things what l think. By contrast, it is the most important base rate. Many banks worldwide use Libor as a base rate for setting interest rates on consumer and corporate loans. Indeed, hundreds of trillions of dollars in securities and loans are linked to libor, including government and corporate debt, as well as auto, student, and home loans, including over half of the United States’ flexible-rate mortgages. It is said about 300 trillion pounds contract and loans are related to this number.

How dose such important rate being manipulated?

      So far, l cannot help to wonder why such important rate can be manipulated. Is there any regulators to supervise it? Nobody to become suspicious when such important rate changed? When l googling some news, l realized that it is possible to manipulate Libor in this particular situation. Firstly, l did like to talk about the formation of Libor rate, to calculate the Libor rate, a representative panel of global banks submit an estimate of their borrowing costs to the Thomson Reuters data collection service each morning at 11:00 a.m. The calculation agent throws out the highest and lowest 25 percent of submissions and then averages the remaining rates to determine Libor. This calculation method give Barclays and other banks a chance to get in, they were came under investigation by a handful of regulatory authorities—including those of the United States, Canada, Japan, Switzerland, and the UK—for colluding to manipulate the Libor rate beginning in 2003. Secondly, the specific economic environment in UK banking area have weaken the supervise power and tempt the bank to interfere Libor rate, as we know,2012 is just after 5 years of financial crisis caused by sub-prime mortgage market. People in UK have already loss a lot confidence in banking area, for banking area, l believe the most essential thing is to let people believe you, if they not, you can hard lend your loans and make your profits. Subsequently, in order to give public confidence and make people believe them, banks are try to make some estimate or fake figures to make their company look health and better, so in my opinion, some banks are not aim directly to rig the Libor rate, maybe they just want their company to look health to public for attract customers. Thirdly, l have found that although the change of Libor rate is a very tiny number, it indeed have big influence to the banks, which l mean such a tiny change is hard to grasp by the regulator. There is an example l find on the finance website which can identity that point. If we see the calculation we can find that the Barclays traders actually affected the rate by only one basis point, they would have made more than $2 million payment based on the notional amount is 80 billion by this tiny change of Libor rate.  

The highest penalties and consequence caused by Libor scandal

      Regulators in the United States, the UK, and the European Union have fined banks more than $9 billion for rigging Libor, which underpins over $300 trillion worth of loans worldwide. Since 2015, authorities in both the UK and the United

States have brought criminal charges against individual traders and brokers for their role in manipulating rates, though the success of these prosecutions has been mixed. The scandal has sparked calls for deeper reform of the entire Libor rate-setting system, as well as harsher penalties for offending individuals and institutions, but so far change remains piecemeal.

Barclays was the first bank to take a penalty, coughing up 290million pound for manipulation. Several others have been hit with fines since, including Deutsche Bank, UBS and Rabobank. No offense, to be frank, l think it is very ridiculous that the government has helped to bail out the UK banks industry in financial crisis during 2007 and 2008, and now they are let down by what they have saved before.

  On conclusion, l think the UK government should have a completely reform in the banking industry, also the external traders and brokers. More efficient legislation and skillful regulator should be built and trained. More important, government and related organization should not always appear when the things has happened, they need to act early, like to publish some mesurament to help public raise confident in bank, maybe that will prevent the Libor scandal happen. But l know economic is always the complex thing, banks should always obey the rules to earn a long living.