About a year-and-a-half ago, LIBOR went from being an obscure acronym from the world of international finance, to the name associated with the latest in a series of global financial scandals. While regulators are still sorting out precisely what happened – and the full implications – there are already some impacts being felt around the globe.
What is LIBOR?
First off, a brief primer on what LIBOR is. The acronym stands for London Interbank Offered Rate. It’s the rate an international collection of banks charge each other when exchanging various currencies. It’s one of many such exchange rates around the world – Canada has its own, the Canadian Dealer Offered Rate (CDOR); more on that in a moment – but the London rate is considered the global standard.
It’s calculated by averaging out the rate that as many as 18 different banks say they would have to pay in interest when borrowing funds. Trillions of dollars in credit card charges, mortgages, car loans, and other items are linked to the LIBOR rate.
Tweaking the Numbers
This is all fine and good, until a few British traders decided to manipulate markets by fudging the numbers. And it was a big scandal. Massachusetts Institute of Technology finance professor Andrew Lo was quoted on CNN saying, “This dwarfs by orders of magnitude any financial scams in the history of markets.”
The banks involved would claim higher or lower interest rates to try to profit on the difference. The direction they tried to drive the overall rate was often based on input from outside traders.
In June 2012, Barclays Capital paid a fine of £290 million – and CEO Robert Diamond resigned – after admitting it had lied in its LIBOR submissions for four years. To date, various banks, including Citigroup, J.P. Morgan, and the Royal Bank of Scotland, have cumulatively paid more than US$6 billion in fines for their involvement in the price-fixing scheme.
Will This Hurt Your Investments?
The overall impact on your individual loans would be minimal at most. But there are repercussions being felt by Canadians here at home and abroad.
Canada’s RBC was one of several banks named in a fraud suit filed by U.S. mortgage agency Freddie Mac trying to reclaim losses on inflated interest rates. A successful suit could impact the value of RBC stock, something millions of Canadians own either directly or as part of their RRSPs and TFSAs.
Could It Happen In Canada?
In an interview with the Financial Post, Bank of Canada spokeswoman Dale Alexander said. “It is important to note that the Bank has no evidence of foreign-exchange market manipulation in Canada.”
Despite that, in a speech this week at York University’s Schulich School of Business, “Financial Benchmarks: A Question of Trust,” Bank of Canada deputy governor Timothy Land said that “Action is now underway” to add oversight to the CDOR.
Mark Carney In The Hot Seat
One Canadian in particular, Mark Carney former governor of the Bank of Canada, now head of the Bank of England head is feeling the heat. He recently announced the suspension of one BOE employee, after records emerged that indicated that senior officials at the English bank may have been aware of market manipulation as early as 2006, yet failed to act.