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Paris - The Euribor and Libor rates at the centre of the
price-rigging scandal hitting Barclays bank are interbank rates at the heart of
short-term financing on a world scale.
The rates are crucial to the global financial system because
they act as a reference or benchmark for the pricing of derivative products
which are traded in massive amounts.
They also indirectly affect loans and mortgages for
households and businesses, and many other contracts.
Libor (London Interbank Offered Rate) is a flagship London
instrument used throughout the world. Euribor (Euro Interbank Offered Rate) is
the eurozone equivalent.
On Wednesday, Barclays said it would pay the equivalent of
£290m to end investigations by British and US regulators into suspected
manipulation of interbank rates.
The investigations could yet drag in some other top names in
international banking.
The interbank market enables a bank to lend money to other
banks, or to borrow funds, when the amount of its deposits exceeds or falls
below customer credit demand.
It is not regulated, banks visit the market on a daily basis
to balance their accounts, and it is absolutely essential to the smooth
functioning of the banking system.
Transactions made using Libor and Euribor rates most often
last from a few days up to a year, and the level is fixed once a day, around
midday.
The Euribor reference rate is set by 43 eurozone banks,
while the Libor rate is preferred by institutions from English-speaking
countries.
Separate reference rates for funds in pounds, dollars and
euro are also set by panels of six to 18 banks.
Barclays was fined for allegedly manipulating the rates to
boost its earnings in the trading of derivative financial products.
When the interbank market seizes up, as happened in 2008
after the US investment bank Lehman Brothers failed, it can bring the flow of
funds between commercial banks to a halt, and the market may remain affected
for months at a time.
When banks no longer trust each other, borrowing rates soar,
and central banks are forced to step in as lenders of last resort, or
governments must agree to guarantee loans taken out by banks in their
respective countries.
This deep interdependence, which was not considered a
problem before the Lehman bankruptcy, is a factor of what is called systemic
risk because it could bring down the global financial system.
Barclays Bank chief executive Bob Diamond resigned on
Tuesday, caving in to political pressure over the rate-rigging scandal which
might trigger criminal charges and is bringing the City of London into
disrepute.
On Sunday it emerged that bailed-out Royal Bank of Scotland had sacked four traders over their alleged involvement in the affair, raising suspicions that the practice was widespread.
