SOMEONE PLEASE!! Explain this rate-rigging thing!

[stealthpenguin]

I'm not an idiot, but I'm seriously struggling to understand what the banks did, how they did it, and the effect that it had.

Please enlighten me!

Thanks for asking!

Well this is nice...

VERY simply, they adjusted the interest rates at which banks lend money to each other in order the increase their own profits at the expense of others. In the long run, 'others' means you and me.

It irks me that the news channels talk about the "Barclays scandal" but don't explain what the bank actually did

Ooh I want to understand too...

Ok. Thanks Sallying, so is this just Barclays?

But is it just Barclays? Or is it ALL banks?

I haven't looked into it much, but the headlines have confused me by saying Barclays 'rigged' the interest rates. How do you rig something unilaterally? Surely some other banks must have been in on it?

I'm still not getting it. But then money issues aren't my strong point. I didn't really understand mortgages until I got one.

Yes, how can one bank rig the rates. Surely the other banks would be all WTF?

I was about to have a vague stab at explaining it but thank god sallyingforth has got there ahead of me!

Basically they fiddled the interest rate at which banks lend to each other, because a high interest rate implies banks are scared of each other meaning there is low confidence within the financial system. A low rate implies that all the banks think their peers are just fine, no one is about to go bust or anything like that, no crisis etc. It gave a false impression, essentially.

Banks, by the way, all lend to each other in order to balance their books at the end of the day. The interest rate at which they do so is called Libor (that's the London interbank offered rate), and it's like a base rate of interest that forms the foundation of a lot of other loans and financial dealings.

I'll stop there, I think!

Libor is an average. By changing their own rate, Barclays helped to bring down the average. Were other banks involved? Umm I don't know. I would kind of be surprised if not. But I don't know.

This is a brief explanation, as I see it (no guarantees it is completely accurate !).

1. The issue relates to the setting of LIBOR (London Interbank Offer Rate). This is effectively the interest rate banks have to pay when dealing with eachother. It is used as a benchmark rate for setting other interest rates. It is calculated daily as an average of rates submitted by 16 (I think) banks. The numbers the banks submit are their estimate of their borrowing costs.

1. There has been an on going investigation over the last 3 (?) years by regulators here and in the US into potential manipulations of LIBOR by a number of banks. The reason Barclays has been named jyst now is that it appears to have decided to admit wrongdoing and pay a fine. Other banks are still being investigated but may also be fined.

1. It seems that there were two different forms of manipulation. The first was individual traders at Barclays trying the influence the people who submit the estimates to submit a number that gave the individual a better result on their particular trade. Its not clear (to me anyway) if this actually succeeded in influencing the ultimate LIBOR rate for the day and gave the individual an artifically better result. Presumably it did. From what I have seen, Barclays have sacked several individual traders for this conduct.

1. The second form of manipulation was Barclays as an institution giving deliberately lower estiamtes of their borrowing costs during 2008 or thereabouts to give a better impression of the financial health of the bank. It appears that Barclays will claim that they did this following conversations from the BoE that encrouaged them to do so in order to give the impression that the UK banks were coping better than they in fact were (it also seems likely that other banks were doing the same). It seems that this may have been a deliberate policy of the government at the time in order to try to reduce panic in the markets during the crisis (which may or may not have been a good thing) but obviously no one at the moment is putting their hand up to admit to doing so.

Anyway, I am sure that someone with more in depth knowledge than me will come along and correct any mistakes.

Off to a meeting now, but willl try to check in later if any questions.

I'm still a little confused, but I'm getting there!

So basically, Average is, say, 10%. Barclays lower the average to 5%. Everyone borrows off them. They're rolling in it.

Right? Or am I missing things?

Banks make public everyday the interest rate at which they will charge each other to borrow / lend money between themselves.

This information is used to calculate the Libor rate everyday.

The Libor rate is then used to calculate everything from Mortgage repayments to complex financial instruments ( that banks like Barclays sell )

Barclays ( and another 20 un-named banks ) lied about the interest rate they could borrow at. This matters as it implies they were healthier than they were, and thus could borrow money at a lower rate of interest which other banks who weren't fixing the rates couldn't.

It also meant that they could make larger profits, and lower losses depending on which way they fixed the rate.

They didn't just bring rates down it went both ways, you see one of the ways banks can make money is by betting on what the LIBOR will be.

Because the LIBOR is calculated based on rates that each bank submits themselves you can try and rig the bet by influencing the LIBOR with either a high or low rate for your own rate.

So your own rate (which is used to influence how much interest customers pay - which is the screwing over customers part) is being set based on how much money it will make the bank instead of what it should be.

It's not just Barclays and it's been going on (and known about) for several years, Federation of Small Businesses have been talking about it for a while.

It's not just Barclays, they are just the rirst to be fined.

OK

Barcalys part A is the one you see on the high st

Barclays part B is the one that deals with buying and selling shares / bonds / making big money for the bankers bonuses.

Barclays part A lends to people like you and me, but they don't actually have any money, they borrow it from Barclays part B. T

So Part A borrows the money and pays interest on the loan, then they lend the money to us and charge interest. The difference between the interest they pay and the interest they charge us profit.

Part A and Part B are not suposed to communicate, Part B is supposed to lend to any bank that wants to at the going rate.

Their profit is the interest part A pays to part B.

What they have been fined for is A and B talking to each other, then Part B charges more interest on loans to B, thus increasing the profit of B.

Part A then lends the money to us at a higher rate and makes a profit.

The bankers get a bonus based on the profit.

Basically we've all be fleeced. Again.

there is a good explanation on the bbc website here

I asked Britannia about what they (the girl behind the counter) thought, she said it was awful but Britannia had just increased their interest rates by quite alot very quickly and not announced it... they are all in it together!

Maybe that was what cameron meant?

So is what they have done illegal?

Maybe that was what cameron meant?

Yes, I think there is 'we the people' and 'we the multi-millionaires' ( of which two thirds of the cabinet are)