Bob Diamond
Bob Diamond, Barclays' chief executive, has turned down his bonus for the year because of the FSA investigation into the bank's rate fixing (Reuters)
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UK and US regulators slapped Barclays with a record £290m fine for fixing key interest rates, the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR), over several years.

Moreover, three of Britain's biggest lenders, RBS, Lloyds and HSBC are among the 17 banks and one broker that are being investigated, following Barclays' involvement in fixing two of the most important interest rates in the global financial markets.

All banks still under investigation, including Barclays which still faces a verdict from several other jurisdictions, face possibly billions of dollars worth of fines and damage payments, say analysts.

Considering the fact that Libor and Euribor valuations directly influence the value of trillions of dollars of financial deals between banks and other institutions, the £290m fine and Barclays CEO Bob Diamond and three of the UK bank's most senior executives' rejection of their 2012 bonuses has been criticised as not being enough.

While critics have called for Bob Diamond to step down, assessing the damage and the widespread fallout following a culture that was chronic for fixing and manipulating rates is more important for the immediate future.

Fixing Libor and Euribor

Libor and Euribor valuations directly influence the value of trillions of dollars of financial deals between banks and other institutions.

The benchmark reference rates are used in euro, US dollar and British sterling over-the-counter (OTC) interest rate derivatives contracts and exchange traded interest rate contracts.

According to FSA data, the notional amount outstanding of OTC interest rate derivatives contracts in the first half of 2011 has been estimated at $554tn.

The total value of volume of short term interest rate contracts traded on LIFFE in London in 2011 was €477tn, including over €241tn relating to the three month Euribor futures contract, which is actually the fourth largest interest rate futures contract by volume in the world. 

Libor is published on behalf of the British Bankers' Association (BBA) and Euribor is published on behalf of the European Banking Federation (EBF).

Until February 2011 the US dollar Libor panel consisted of 16 banks and the rate calculation for each maturity excluded the highest four and lowest four submissions.

An average of the remaining eight submissions was taken to produce the final published Libor.

At each bank, "submitters" file their daily Libor rates to the BBA.

At Noon, the BBA then publishes the rate, based on averages from submissions made by a number of banks selected by the BBA or EBF.

However, submitters at Barclays were consistently filing false figures in order to deliver favourable numbers for traders and senior managers.

In emails released by the FSA, when one submitter sent an email notifying traders that they would be in late on a certain day, the trader responded by saying "Noonish? Who's going to put my low fixings in? hehehe."

The submitter replied, "... will be here if you have any requests for the fixings."

The falsifications have been systemic.

In other emails, a trader at a different bank wrote to 'Trader G' at Barclays: 'Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger.' 

Other damning emails revealed that rates were fixed and confirmed with a: "Done ... for you big boy."

The figure banks should file should technically reflect what the bank thinks it can borrow that day. A lower number means a more favourable image of the bank because it means the firm is under less financial stress. If the rate was higher, it would suggest the bank is under more stress and therefore the amount of money the bank has to pay to borrow money would be higher.

The misconduct of false submissions and fixing rates will mean other banks will be implicated into the matter, say the FSA, because in order to manipulate levels, other submitters have to be involved.

"We have a number of investigations that are ongoing," said Tracey McDermott, director of enforcement at the FSA. "Obviously we need to look at each case on its own particular facts but the initial indications are that Barclays was not the only firm that was involved in this."

Following the FSA announcement of the outcome of the Barclays fine, the BBA confirmed it is undertaking a review of the way LIibor is set and will publish its findings shortly.  

The FSA added "along with the other tripartite authorities, is working to support market-led reviews of existing arrangements, with the goal of ensuring such arrangements continue to command the confidence of all stakeholders. "

How it Effects Consumer?

Fixing Libor and Euribor rates does not just paint a different picture of the banks welfare or financial state - it also can have a profound effect on the everyday person on the street.

The effect on the general public can be felt on an immediate level because the wholesale rates influence how much homeowners pay on variable rate loans and mortgages.

Some mortgages are influenced by the Libor rate, which mean many homeowners could have been making monthly payments that were tracking rates that were artificially effected.

Even if a homeowner had not been on a variable rate, Libor is what banks use to set interest rates when it comes to charging interest on loans, credit cards and other mortgages.

For the last few years, if the Libor and Euribor rates had been found to be directly affected, consumers could have been paying either too much or too little in interest and payments.

The Libor rate was designed to reflect a far more accurate appraisal of real world circumstances because the rate is set by an average calculation by a number of banks.

However, if other banks are implicated in the Libor fixing scandal, then it could mean that rate setting system has to fundamentally change as it is too open to abuse.