Did Barclays' LIBOR manipulation affect my mortgage rate? Probably not.

Last post: Jun 28, 2012

Set aside the hyperbole and faux outrage from the tabloids and read what really happened with the LIBOR manipulation "scandal"

The recent furore over Barclays and the LIBOR fixing scandal has, I feel, been blown a bit out of proportion. Watching Tony Robinson on BBC's Question Time tonight confirms that the public still hasn't tired of bashing the bankers but what I fear is getting brushed over in the clamour to land another blow is the truth. Let me be clear at the outset though that in no way does this article set out to condone what Barclays or any of the banks did or are alleged to have done. Any kind of manipulation of such a key rate as LIBOR is unethical and reprehensible. What I do want to do is clarify the context in which this may have happened and to outline the impact it may have had on mortgage holders. To start with let's look at how LIBORs are set. For each currency the British Bankers' Association selects 16 banks that it feels are active in this currency's cash lending market to be on a panel that set LIBOR. At about 11 o'clock each day the BBA independently ask them where they feel they "could borrow funds" in each of about 15 different periods ranging from Overnight to 12 months. With results from all 16 banks received, for each period in question the BBA disregard the highest 4 submissions and the lowest 4 submissions and with the remaining 8 they take a simple average. That's how LIBOR gets set. This therefore means that Barclays have, at best, an influence over one eighth of where the final rate is set. If they set it too high or two low then they would be one of the ones eliminated and their influence would be further reduced. How does LIBOR affect mortgage rates? Put simply, the rate at which banks lend to you is determined by the rate at which they themselves can borrow funds. If LIBOR is higher over a prolonged period of time then banks will have to pass this onto their mortgage holders. Now let's examine these two statements in context of what is happening today. Barclays stand accused of manipulating LIBORs such that it cost mortgage holders money. This doesn't stack up for three reasons:
  1. As I've shown above their influence on LIBOR is limited as they are one of a panel that set the rate
  2. Ultimately Barclays had to set a LIBOR broadly in line with where the market was. If cash was trading at 5.25%, they couldn't just set 10% and expect no one would notice. The manipulation we're talking about here was a few basis points, no more. If mortgage rates went higher over a period it was down to the fact that cash was genuinely trading at more expensive levels and not because one bank set their LIBOR 5 basis points higher than the others
  3. From the emails released by the FSA in their investigation it seems that the LIBORs set by Barclays were not always higher but sometimes lower, depending on the requests of the derivative traders. If Barclays had the influence that some are implying they did, why did this then not result in mortgage rates being lower too?
I'm afraid it seems to me that once again in the rush to dish out cold helpings of humble pie to bankers, the facts have got slightly mixed up. What Barclays did was wrong - no question about that - but its impact on LIBORs and mortgage rates was far less than some commentators would have us believe. I guess all I'm saying is that if you think this is the next big mis-selling scandal that will allow you claim back thousands for the higher mortgage rates you paid, my suspicion is that it isn't.