Libor scandal

Bob Diamond, former chief executive of Barclays Bank, has apologized to a UK parliamentary enquiry for the activities of his bank, which he described as "reprehensible."

On Tuesday, Diamond had been forced to resign, becoming the highest-profile victim of the current scandal. Two other senior Barclays executives had resigned earlier.

Diamond said in a statement on his resignation that the pressure on Barclays had reached a level that threatened the future of the bank. "I cannot let this happen," he added. The 60-year-old had been with the bank for 16 years.

Last week, Barclays was ordered to pay a fine of 360 million euros ($454 millon), because investigating authorities in Great Britain and the United States proved it had manipulated interest rates in on inter-bank loans.

Facing a grilling

But the damaging revelations are likely to continue, and may well have repercussions for the entire banking sector. The parliamentary select committee which questioned Diamond is looking into whether the Bank of England was implicated in the manipulation of Libor - the London Interbank Offered Rate - the rate at which banks lend to each other.

Barclays is the first financial institution to accept wrongdoing, but the scandal is likely to go far beyond one single bank.

A number of other major banks in the US and Europe have also come under suspicion - investigations have been underway for months.

They include Germany's Deutsche Bank and Switzerland's UBS - something David Buik, an analyst at BGC Partners, called "the tip of the iceberg." It would not be possible for just one bank to fix interest rates, and it would be "impossible" for the scandal to be limited to Barclays, he said.

The UK's Financial Services Agency has also made it clear that Barclays is not an isolated case.

Attempts to manipulate interest rates

The scandal dates back to before the onset of the financial crisis. Between 2005 and 2008, authorities detected irregularities both in London's Libor and in the European Euribor (Euro Interbank Offered Rate). These rates underpin transactions worth trillions of dollars. Barclays was accused of manipulating Libor, which serves as a reference for loans to private individuals and companies, as well as other financial products and derivatives trading. It is based on data provided by several major banks each day.

The institutions are accused of deliberately providing false information to boost their own trading profits and to conceal the true state of affairs - to give a better picture of the bank's state of health.

This is a grave allegation: "Libor is the foundation for all other interest rates. Every small loan ultimately depends on it. To manipulate this rate is serious," said Stefan Stern of the Cass Business School.

Inquiries all around

The charges have led to renewed calls for fundamental reforms in the UK banking sector. The media have proclaimed the system "rotten to the core." British Prime Minister David Cameron responded by announcing a new investigation into the banking sector that will also address topics such as ethics and transparency. He plans to set up an inquiry, before which banking executives will have to testify under oath. The inquiry, which will begin "immediately," will include representatives from both houses of parliament and be given "full access" to all documents.

Britainshould have "the toughest and most transparent rules on pay and bonuses of any major financial centre in the world," he said. Bankers who have acted wrongly should be held accountable," Cameron added.

But the opposition Labour Party argues that this is not enough - it says the public wants a full, judge-led independent inquiry that will truly get to the bottom of the issues.

Author: Simon Bone
Editor: Michael Lawton