News / Europe

British Banking Scandal Likely to Spread

A view of Barclays headquarters at London's Canary Wharf financial district, July 3, 2012.A view of Barclays headquarters at London's Canary Wharf financial district, July 3, 2012.
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A view of Barclays headquarters at London's Canary Wharf financial district, July 3, 2012.
A view of Barclays headquarters at London's Canary Wharf financial district, July 3, 2012.
Jim Randle
A scandal over a major British bank unfairly manipulating interest rates threatens to engulf more major banks around the world.  The case has already seen Barclays Bank pay a huge fine, sparked a flurry of investigations and hearings, and might result in changes in laws that govern financial firms.  

Impact

Barclays is one of 18 banks that help set a daily benchmark for many interest rates around the world by reporting what they expect to pay to borrow money.  The result is called the “LIBOR” which stands for "London Interbank Offered Rate."  

White-collar crime expert and former Department of Justice attorney Michael Weinstein says LIBOR has a huge impact on global commerce.

“It is fair to say it is not millions, it's not billions, it's trillions of dollars impacted by the LIBOR rate.  So the impact is not only domestic here in the United States, but globally and internationally,” Weinstein said.

Some of the efforts to manipulate interest rates occurred during the financial crisis, when investors, depositors, other banks, and regulators were worried about the financial strength of banks.

Barclays paid a fine of around $450 million for, among other things, lying to rate-setting officials by saying they were paying a lower interest rate than they actually were.

Pace University expert on corporate governance, John Alan James, says Barclays misled officials because a low interest rate is a vote of confidence in a borrower by a lender.

“They come in low and it shows that they are stronger than they really are,“ James said.

On other occasions, Barclays’ officials falsely said the interest rate they had to pay was higher than it actually was, in an effort to make money on investments that were essentially a bet that the LIBOR would rise.

Both actions hurt consumers.

Manipulation

Manipulating the LIBOR interest rate higher means people were unfairly forced to pay more on mortgages, student loans and other transactions.   And manipulating the interest rate lower unfairly cut the returns paid to people who rely on savings and investments with interest rates tied to LIBOR rates.  

Weinstein says investigations are underway in a number of countries and the scandal could spread widely.

“I think you are going to see almost all of the world’s major banks get hit with this to some degree.”

He adds he expects governments and regulators to tighten rules and supervision of banks in response.

But Hofstra University finance professor Anoop Rai says lawmakers and regulators must strike a careful balance; too little regulation allows too many dishonest practices, but too much supervision slows commerce and hurts the economy.

“It is very difficult to get an optimal set of regulations, too much or too little, said Rai. "And over time, markets forget, and we see this recurring behavior so many times,
one just has to scratch their head and say how do we get buyers to beware.”

Nevertheless, Pace University's John Alan James expects that some actual, constructive change will come from this scandal because, as he puts it, “This is too big to put under the rug. “

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Comments
     
by: Raymond Murdock from: Washington DC
July 14, 2012 11:55 AM
For some time this part was left in free alberdio banks that handle only the economies of each country. Inadmissible. Speaking of Economy and Banks is like talking about water and oil. Do not mix. Much less let them engage in Economy. The question is why does this happen? Overconfidence. Overestimation of honesty. Drivers or inspections obsolete. Conspirators or groups to commit unlawful. Loopholes. Jurisprudence which validates fraudulent acts without exemplary punishment. Free dubious agreements and guarantees to escape or avoid justice. Too obvious and made ​​worse by lack of something elemental?.-

by: Lorain from: USA
July 11, 2012 2:46 PM
Olympics in Britain... who want to go and see London...??? might as well stay in Cairo or Baghdad... UK has become Muslime
In Response

by: Mary from: USA
July 11, 2012 9:33 PM
London's a fascinating city and one of the most interesting places I've ever been; you're doing youself no favors by so blithly writing it off.
Your demographics are seriously off, by the way. The vast majority of the British are at least nominally Christian and secular in practice. No one's installing Sharia over common law there anytime soon.

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