The smokescreen that is the LIBOR scandal

Posted in 'Personal Finance' by Barry Stamp

05 July 2012

Don’t be fooled by the furore surrounding LIBOR and the pantomime of the Diamond grilling. There are far more important interest rate movements that need to be questioned, all of which are set by committees of individuals, and all of which have far more impact on ordinary consumers and on more businesses than LIBOR.

Why does the manipulation of LIBOR get all the attention, together with ridiculously muddled reporting, when there are far less explainable interest movements going on elsewhere?

Yes, the manipulation of LIBOR was ‘reprehensible’, and apparently down to just 14 rogue traders. Yes, the LIBOR scandal follows the PPI mis-selling debacle, (we warned our customers loud and clear about that one, well before the issue broke). Yes, the need to bail-out some of our major banks has caused many to lose confidence, but as Gordon Brown said often enough, ‘it’s a global crisis’. Yes, the upcoming fixed interest rates/swaps/derivatives mis-selling ‘scandal’ is beginning to get more column inches – but honestly, how come most ordinary folk understand that if they take out a fixed rate loan there are nasty penalties for early exit, but some businessmen, it seems, don’t realise this blindingly obvious consequence.

But why fuss about LIBOR? It’s a negotiated rate at the end of the day – so why aren’t the other parties - the inexplicably shielded ‘Banks A, B, C and D’ – being named and shamed? Unlike other rates, LIBOR is supposed to be overseen by a trade body - the British Bankers’ Association. Where are they in all of this? And if LIBOR is so important, why can’t anyone put a figure on the damages caused by the reprehensible manipulation of the rate?

Many questions, but no answers.

The hard fact is that relatively few consumers are affected by LIBOR. Most are affected by the Standard Variable Mortgage Rates that are set by individual mortgage lenders. These have increased significantly over recent years with no corresponding underlying increase in the Bank of England Base Rate or of LIBOR for that matter. Once upon a time mortgage rates were set at approximately 1% above Bank Rate. Not any more – otherwise we’d all be getting mortgages at 1.5%. Yet Standard Variable Mortgage Rates affect the vast majority of mortgage holders. Where’s the questioning about that?

Credit card interest rates are set by individual card issuers. They are more expensive now, when Bank Rate is 0.5%, than they were when Bank Rate was 10% higher. A huge amount of consumers are affected by credit card interest rates. Who is looking at that anomaly?

Payday loans are now extended at over 1500% APR. They are booming as many struggle to make ends meet. Compared to payday loan interest rates, LIBOR doesn’t even register on the Richter scale.

The LIBOR scandal certainly diverts attention away from interest rate issues that directly affect consumers

Barry Stamp is a co-founder of Checkmyfile and is a Chartered Banker and a Fellow of the Institute of Credit Management. He can be contacted at barry.stamp@checkmyfile.com.