Managing Libor Rates: Transparency and Secrecy.
What are Libor rates?
They are rates of interest that banks believe they will have to pay for borrowing money over future months ; and covering a variety of different currencies.
Who sets them?
All the major banks, the British Bankers Association, and the Treasury are all involved.
Is fraud involved in the setting of these rates?
The Serious Fraud office is currently investigating. Barclays has been fined. Royal Bank of Scotland expects to be fined. HSBC is involved , but has not set any money aside to pay for expected fines.
If a bank wants to avoid being bailed out with tax payers money, then a low libor rate shows that the bank is safe, and not needing a bailout. This was important for Barclays in 2008 when it was getting foreign investment.
A committee chaired by the British Bankers Association sets the rate based on figures by those invited to the meeting. It is not known who attends, what they recommend, or the influence of the Treasury . The chair takes all the figures and produces an average. But what sort of average is it? Is any one members figure weighted to take account of the bank’s size? Are international banks figures weighted, to take into account their global reach? Does the Treasury have more or less influence than the banks? Was any member aware that giving figures that did not reflect actual current rates, or an honest assessment of future rates, could be construed as fraud? Which were the various foreign currencies affected?
There seem to be no answers to any of the above questions. But what is now revealed is that there is little transparency in this process. But nearly everyone is affected. When banks get higher libor rates, it allows they to charge higher interest rates to their customers and mortgage holders.
The current, and long established, system is bank self-regulation. The British Bankers Association is a sort of trade body for banks. The Financial Services Authority is now considering bringing this system under the remit of the law.
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