The financial scandal that brought down Barclay’s CEO Robert Diamond is growing to include British banking regulators and other investment banks, threatening the very credibility of the Libor benchmark interest rate.
In advance of testimony before Parliament on Thursday, Diamond released an internal email from 2008, documenting a conversation between Diamond and Bank of England deputy governor Paul Tucker. In the email, Diamond indicates that Tucker essentially told Barclay’s to underreport Libor rates, indicating that other banks were doing the same.
The Libor rate tracks the rate at which banks in London loan money to each other. The rate serves as an index for assets totaling $360 trillion dollars, including many adjustable-rate mortgages in the United States.
Barclay’s manipulation of Libor in 2008 was tied to that year’s banking collapse; lower Libor rates were seen as indicative of a healthier system. The misreported rates may have helped lessen pressure for London officials to aggressively investigate and regulate the banking system.
Barclay’s is not just accused of reporting lower Libor rates during 2008. From 2005 to 2007, Barclay’s allegedly manipulated the rates they reported in order to boost their profits on internal trades.
The manipulation of Libor creates a crisis of confidence in the benchmark rate. Libor is calculated by Thomson Reuters for the British Banking Association and is based on self-reporting by banks.
Barclay’s has already paid $450 million in penalties to U.S. and U.K. regulators. It remains to be seen whether other banks or officials will be dragged into the scandal and what the fallout will be.
Image Credit: Nick J. Webb