Scratching the surface of the LIBOR scandal

Zintro experts weigh in on the LIBOR (London Inter-bank Offered Rate) scandal and talk about potential impacts to Barclays PLC, The Bank of England, and the world banking sector.

Brian Weakliam, a global leading banking analytics expert, says that according to Morgan Stanley, 12 global banks could face as much as $22BN in combined regulatory penalties and damages to investors and counterparties. “The misreporting of LIBOR rates has probably gone on since 1986, the year it was introduced. Companies and traders will have won and lost as a result of its manipulation. All that has emerged to date is the fact that LIBOR was manipulated rather than the specific details,” he says. “LIBOR was a flawed concept from the outset because it assumed unlimited interbank liquidity. Since the credit crunch, many banks have had difficulty accessing interbank funds. With the benefit of hindsight, LIBOR (and other benchmarks including EURIBOR and Prime) should have been replaced a long time ago.”

The full extent of the manipulation and its effect on the fixing of the LIBOR rates is very difficult to quantify, notes Weakliam. “However, it is likely that more specific details will emerge when other banks (to date Barclays are the only ones to put their hands up) are forced to come clean. It will then become possible to estimate the losses suffered by corporate clients of these banks,” he says.

Investigations by various agencies may reveal which banks and on what dates the rates were manipulated and by how much this influenced the level at which LIBOR was set, Weakliam says. “We then have to move on to other benchmarks like EURIBOR and Prime. If a company has any financial instruments that are priced off these types of benchmarks, executives should start digging into their treasury archives now and be prepared.”

Companies need to start using modeling tools to interrogate their exposures to historical LIBOR rates and the impact of changes to the cost of/revenue from financial instruments, Weakliam suggests. The salient factors to be considered in a claim will be:

  • Effect on daily LIBOR rates of manipulation
  • Time period of financial instrument
  • Mitigation of losses when netted against gains from other financial instruments
  • Extent to which damages can be related back to a specific bank
  • Overall acquiescence of central banks/regulators
  • Possible claims by banks against other corporates who actually gained

Alexey Bulankov, a financial adviser and planner with expertise in financial markets, private banking and investment products, says that the recent scandal, which shook financial markets, was the fixing of the LIBOR rate or the London Inter-bank Offered Rate. This rate is the average interest rate on borrowing estimated by leading banks in London. “The implications of this scandal have not yet been fully felt or understood and the consequences will take years if not decades of court battles to unravel,” says Bulankov. “LIBOR is intertwined in most every financial deal made, be it a credit card rate, mortgage, or a derivative security. LIBOR is the benchmark for money-lending.”

Bulankov says that while the rank-and-file investors may not feel like they are affected by deals that went sour in the derivatives markets, markets for swaps, and other esoteric instruments, many fail to understand that the rate manipulations may have affected the solvency of the pension on which they will rely on, the yield on bonds they may hold in their portfolios, and many more daily aspects of their daily lives. “The fallout is likely to be huge. No matter which floor of the financial skyscraper you find yourself on, the fact is that the foundation just turned out to be built on quicksand. The most obvious fallout will be costly and protracted legal battles between banks involved in fixing the rate and large and small clients who were hurt by the manipulation,” Bulankov says. “The overhaul of the entire financial system is another inevitable consequence. While it is impossible to predict all the ramifications of the fallout, one thing is for certain; it will take years if not decades to put this behind us.”

By Maureen Aylward

Zintro, Inc

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