This article by Reuters via CNBC, ‘Done… For You Big Boy’ – How Emails Nailed Barclays, blows open how partial the process is for a bank to influence the London Interbank Offered Rate. To summarise, in-house AND external traders, through direct contact with Barclay’s Libor submitters, influenced them to set rates at requested levels.
From BBA Libor – The Basics, you can see that its intention is to capture the market consensus for the cost of borrowing. With the self-serving interests of Libor-linked derivatives traders, in-house or otherwise, this tool which is supposed to reflect supply and demand forces, has been subsumed into the very market it is trying to benchmark.
It’s basically become a cartel, where players are colluding with each other to fix prices. Which, on a personal level, doesn’t really affect me.
APART FROM THE FACT THAT MY HOUSING LOAN IS PEGGED TO IT.
Since we can see that true supply and demand has less influence on this rate than “a bottle of Bollinger”, once the tide swings with these Libor-linked derivatives, for whatever reason, your Libor-pegged home/business loan interest has the potential to balloon multiple times over.
Worth taking note and start shopping around.
Apparently RBS was in on it too. RBS Faces Hefty Fine as Libor Scandal Spreads: Report
PDF’s of the web links (in event they get taken down or changed from the time of this post):
‘Done… For You Big Boy’ – How Emails Nailed Barclays
BBA Libor – The Basics
RBS Faces Hefty Fine as Libor Scandal Spreads: Report