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Thursday, 5 July 2012

Idiot's Guide to Barclays Bad Boys

OK confession time. Hands up you if are really angry about the way that Barclays Bank has behaved. Hands up again if, like me, you know they have done something really bad but are not absolutely sure what it is.

This is something which affects all of us at some level so here is what I know.

It is all about LIBOR which stands for London Inter Banks Offered Rate. Now something many of us have learned since the banking crisis of 2008 is that banks lend to each other. There can be all sorts of reasons for this. At the end of a day’s trading a bank might be a bit short of cash – if it has paid out more than it has had in deposits. So they borrow the shortfall. On another day it might have a surplus. So it will lend money to a competitor with a shortfall.

LIBOR is the average rate they have to pay for this borrowing. It is calculated by the British Bankers Association based on information they receive from the leading banks about what they have to pay. It gives a broad picture of how strong the banks are generally. The lower the rate a bank has to pay the stronger it looks and this boosts its standing. This is where Barclays come into it. They were putting in false figures to make them look stronger than they were. During the worst of the crisis putting in low figures made them look stronger than the rest.

So what?

Well not only did this give a false impression of Barclays it also skewed the LIBOR rate which gave a false impression across the sector. This in turn has a knock on effect down the line which can ultimately affect the amount you and I are paying for our mortgages or any other loans for that matter.

It also adds to a general feeling of mistrust. This is the main concern. Most of us place all of our income and savings with one or more banks. If they are guilty of this level of misconduct – with our money – how can we trust them with anything?

There clearly needs to be a full investigation. Some commentators are saying that whilst the behaviour was wrong it was not illegal. This has to be looked at. A person can be prosecuted for working in order to supplement a meagre benefits income, or for understating their income on a tax return. So wealthy bankers must be no less accountable for their misdeeds.

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