Don't bank on it

By The Economist online

A closer look at LIBOR submissions in 2008

THE huge fine handed to Barclays bank for attempting to manipulate LIBOR, an interest rate, is beginning to assume global significance. LIBOR, the London inter-bank offered rate, is important because it forms the benchmark for global financial instruments and the prices that consumers and companies pay for loans and receive for savings. It is determined by a panel of banks for ten currencies at 15 maturities. The most important is three-month $ LIBOR, which is supposed to indicate what a bank would pay to borrow dollars for three months at 11am on the day it is set. The top and bottom 25% of submissions are excluded from the final calculation. As the chart shows, after Lehman Brothers collapsed in 2008, Barclays' numbers were among the highest. Indeed, the bank has admitted to asking traders to keep its numbers in the top four (and so be discarded), but not high enough to draw attention to it. But a complicating factor is whether Barclays thought it had the tacit support of regulators and the Bank of England. Notes taken by Bob Diamond, then head of investment banking, of a phone call from Paul Tucker, a senior official at the central bank, appear to have been interpreted by some at Barclays as a nudge and wink to fudge the numbers. Its submissions fell the following day. Read more on the LIBOR scandal and Barclays.