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Banks face rate-fixing backlash

By David McMillin ·
Friday, July 6, 2012
Posted: 3 pm ET

Over the past week, the financial world has been buzzing with news that banks worked together to fix the London Interbank Offered Rate, also known as Libor. Currently, the only bank that has admitted wrongdoing is British-based Barclays, and the bank is suffering a pretty serious fallout from the scandal. It recently paid settlements of around $453 million to government agencies, including $160 million to the U.S. Department of Justice. The bank's CEO resigned, and Barclays has found its name in the headlines for all the wrong reasons.

Libor is based on the projected costs of borrowing between banks. Like many other complex elements of the finance industry, these rates ultimately have consequences for everyday consumers like you. Libor impacts everything from credit card interest rates to adjustable-rate mortgages.

I spoke with Greg McBride, CFA, Bankrate's senior financial analyst, to get a sense of what this news means for the banking industry. Because the rate is an average of submissions from financial institutions that discards the highest and lowest figures, McBride says that the likelihood that one bank could manipulate Libor is small. Still, he says, the ongoing investigation points to potentially bigger issues.

"The very attempt to manipulate global markets is behavior that regulators do not tolerate," McBride says. "If more than a handful of banks are found to be complicit, it hits at the very integrity of financial markets around the world."

What does that mean for the future?

"Deriving a global interest rate benchmark from banks' own estimates of their borrowing costs is fundamentally similar to having the fox guard the henhouse," McBride says. "Ultimately, the bigger picture of this news is that this may fuel a concerted shift away from benchmarks that rely on bank submissions."

The first news of this scandal is making the biggest waves across the pond, but it looks unlikely that Barclays was the only institution guilty of foul play. Regulators are currently investigating other banks for potential wrongdoing, so you can expect to hear plenty more about this issue over the next few months.

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