Over the last two weeks, Barclays Bank has admitted that staff in 2008 (in the chaotic financial markets following the Lehman Brothers collapse) had sought to manipulate the daily fixing of LIBOR (the London Interbank Offered Rate).  LIBOR is a key set of interest rates, indicating the short-term borrowing costs on the inter-bank market of the largest and most active banks in the world.  Trillions of dollars of loans have interest rates set in relation to LIBOR, and hence even small variations in LIBOR can lead to billions of dollars of higher (or lower) profits.

The scandal is a serious one.  Barclays Bank paid a fine of 290 million British pounds (equal to $453 million), the Chairman of the Board Marcus Agius resigned, CEO Robert Diamond resigned, there have already been Parliamentary hearings, and there will be further repercussions for Barclay.  Barclays’ stock has plummeted.

But what is odd is that, so far, there do not appear to have been major implications for other major banks that participate in the LIBOR setting process.  To see this, it is important to understand the rules under which LIBOR rates are set each day.  The process is organized by the British Bankers’ Association (BBA), which provides a good description on its web site.

LIBOR is set each day by submissions from panels of major banks, with separate (but overlapping) panels of banks for each of the 10 currencies being covered.  For borrowing in US dollars, 18 banks participate.  Each submits in London, at 11:10 am local time each working day, a figure which that bank indicates would be the cost for it to borrow funds from other banks were it to do so on that day at 11:00 am.  Separate submissions are provided for each of the time periods for such borrowing, from over-night funds to twelve month funds.  The three and six month periods are probably the most common dollar LIBOR figures the market focuses on.

The BBA (or to be more precise, BBA Libor Ltd.) takes the daily submissions, examines the data for any obvious errors, excludes the top four and bottom four submissions from the 18 banks (for the US dollar rates) for each of the borrowing periods (from over-night to 12 month), takes the simple arithmetic average of the middle ten submissions for each of the borrowing periods, and then publishes this by 11:30 am.

The important point here on the question of whether Barclays alone could have manipulated these rates is that the top four as well as the bottom four submissions are excluded from the calculations of each of the LIBOR rates each day.  If the Barclays submission alone were an outlier, it would not have mattered as that submission would have been excluded from the calculation.

Hence Barclays attempt to manipulate the LIBOR market could not have succeeded unless it was in either tacit or explicit collusion with at least four other banks.  Yet while investigations continue by both the UK and US bank regulators (and probably others), the markets do not appear to have paid much attention to the possibility that other banks will be charged with colluding with Barclays in attempting to manipulate the LIBOR rates.  There are three US banks on the US dollar LIBOR panel of 18 banks:  Bank of America, JP Morgan Chase, and Citibank.  But while the price of Barclays stock has dropped 15% in the two weeks since the LIBOR manipulation charges came out, the prices of these stocks have been largely flat.  The other banks on the 18 bank panel include three others from the UK (in addition to Barclays), three from Japan, three from France, two from Switzerland, and one each from Germany, the Netherlands, and Canada.