FEW people had any idea what Libor, the London interbank offered rate, was until until the financial collapse forced a greater interest in the working of banks.
Yet the obscure process is the crucial mechanism used used to set interest rates for mortgages, loans and savings and is the benchmark for an estimated £222 trillion of worldwide financial contracts.
Five years ago a sharp rise in Libor provided an early warning of the downturn as banks started to charge each other more to borrow money. Inevitably, the banks protect their profit margins by increasing the cost to the millions of borrowers now facing rising mortgage rates. With the revelations that Barclays attempted to manipulate the global rate, they now know that their extra payments are the result of illegal fixing of the rate by bank traders who effectively lied about what it was costing the bank to borrow money.
The record fine of £290 million imposed on Barclays (mitigated because the bank helped the investigation) shows just how egregious the behaviour was. But with lawsuits related to the Libor rate scandal expected to dwarf the fine and Royal Bank of Scotland, Lloyds Banking Group and HSBC also under investigation, it is likely to prove the tip of an iceberg capable of damaging the entire banking industry. Such a crisis would be entirely of the banks' own making, which is why heads should roll and, if there is sufficient evidence, there must be criminal prosecutions.
Barclays chief executive Bob Diamond and three of his senior staff are to waive their bonuses for this year. If they think this amounts to atonement, they are wrong. Are their memories so short as to forget the lessons of recent years? Mr Diamond was running the so-called "casino" part of Barclays when rates were being rigged to increase the very profits on which bonuses were calculated. Regulators have not found evidence linking him personally to the wrongdoing but, if he was not party to the dirty details, he allowed a culture to develop in which staff knowingly broke the rules with no regard for the wider consequences. Mr Diamond will receive some probing questions from the Treasury Select Committee. His inquisitors as the representatives of taxpayers and bank customers deserve full and honest answers. If he is not to blame then we should know who is. That would be even more true of RBS and Lloyds which are accountable to the taxpayer as well as to their customers and both of which are reported to have dismissed staff as a result of the investigation into Libor rates.
The culture of irresponsibility, which flourished with the failure of light-touch regulation, has already cost taxpayers billions of pounds. They will want to a Libor-setting system that cannot be abused by a self-serving cartel of bankers. The timely opportunity provided by the Financial Services Bill to introduce rigour and transparency must be seized. The firewall between investment and retail bankers must protect customers and mortgage holders from bearing the cost of traders' failures. New regulation must also ensure ensuring such conniving greed can never again take hold of and permeate our banks.
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