The Libor scandal has rocked the banking industry and those involved may face possible jail time. Last Friday it was announced that Britain’s Serious Fraud Office will investigate the manipulation of the Libor (London Interbank Offer Rate) which stipulates the interest of bank borrowing rates from one another.
Such interbank borrowing would be used to meet any deficits a bank may face after a day of trading or if a bank finds itself with a cash surplus then it can lend to other banks which have shortfalls- which is where the interest rate is calculated using the Libor rate.
Former Barclays Chief Executive Bob Diamond resigned from his role due to mounting pressure.
Now you may be asking why the Libor rate is so important. Well it’s estimated that $350 trillion worth of contracts have been made which in some way or another relate to the manipulated Libor rate, meaning a high number of consumers, investors and businesses have been misled.
It was revealed late last month that Barclays had manipulated the Libor rate for for their own financial gain which meant customers received misleading rates which could have affected those seeking loans and mortgages.
The bank agreed to pay £290 million in penalties and former Barclays Chief Executive Bob Diamond has recently been grilled by a Select Committee over his role in the scandal where he said “I’m sorry, disappointed and angry”, following his decision to step down as Chief Executive along with other senior figures at the bank.
Danny Alexander, Chief Secretary to the Treasury said “As a government, we will make sure the SFO has all the resources it needs to conduct this investigation in full… I want the SFO to follow the evidence wherever it goes, to bring prosecutions if they can.” [BBC].
Regulators are currently investigating the scandal and haven’t ruled out the possibility that other banks were involved in rate fixing. But with so many assets based on the manipulated rate, we can expect more lawsuits and evidence to surface as investigations take place.
Aaron Stevens.
Tags: barclays, bob diamond, Libor, scandal, serious fraud office
Yesterday 07:43 AM
Incremental Risk Charge: An analysis: Going forward how much will the Libor scandal cost Barclays Bank and who will be chosen to lead its affairs.
Answer: See No.5 below.
In the aftermath of the Barclays Bank Libor scandal (financial Hiroshima) and their greed and subsequent cover up tactics, we studied the future impact on the bank and its franchise in the next 6-8 months using the ## Monte Carlo method and the capital asset pricing model. This has been developed using variable analysis on a common measure of the volatility of its ongoing business, i.e. its beta–which is determined using linear regression. These have been applied to the latest audited Barclays Bank balance sheet, their Libor rate rigging scenario and inferences drawn with 95% accuracy. The result highlights the following 5 points:
1. In the next 12 months, as its market standing and franchise has suffered, the Barclays Bank group will have to make a loan loss provision of USD 5.75 billion.
2. Their combined exposure (including paper transactions) is USD 1.35 trillion which they need to unwind at the earliest and reconcile their financials/book of accounts within 24 months. Overall loan losses to be written off could be around USD 3.5 billion and thus their paid up capital will be affected.
3. Their International trade, LC and LC confirmation business, correspondent banking business will reduce by about 40 % in the next 12 months as their price/rate quotation/covenants/IM will be seen with suspect.
4. As a result of (3) above, their overseas operations will reduce (some businesses will have to close down) by at least 30 % globally. This will open up a new avenue wherein, in the next 24 months, their overseas business will very likely be acquired by 2 Chinese and 1 Australian banking consortium.
5. The above points indicate that they will definitely need UK Government bailout well within a year. The UK government is already planning to nationalize the bank and make it a pure local British deposit taking bank going forward with an Australian as its head. Deposits/customers will come back to the bank only if the banks’ Investment Banking activities is completely spinoff. The Americans will make this happen.
## Methodology: I also used the Levy distribution – a continuous probability distribution which is unbounded below and above. The normal distribution is a special case of this with the parameter being one half of the variance. The Levy distribution, or Pareto Levy distribution, is increasingly popular in finance because it matches data well, and has suitable fat tails. The tail of the distribution decays like . Mean = and Variance = .