How Libor cost Bob Diamond his bankers' bonus

Banks aren’t having a good run of it at the moment. No sooner has RBS hoped to put to bed its software disaster than Barclays rolls in to view after being slapped with the biggest fines of their type ever levied in the UK and the US.

Barclays has reached an agreement with regulators on both sides of the Atlantic to settle an investigation into price-fixing of a little known but very important interest rate figure, called Libor. Barclays has to pay fines adding up to £290 million and, even more eye-catching, its controversial CEO, Bob Diamond, has agreed to forgo his bonus ($20.1 million last year) alongside a handful of other top executives who will also forgo cash.

So what triggered this contrition?

Libor is the rate which banks say they can lend to each other (it stands for London Interbank Offered Rate). Every day a panel of banks set out what rates they think they can borrow from other banks over a range of periods, from overnight up to 12 months. The data is collated, the top and bottom estimates are stripped out and the rest are averaged to give a figure. For example today’s rate for banks borrowing from each other for a year was fixed at 1.68713 per cent.

That little figure turns out to be extraordinarily important because it is a reference used to fix contracts of all sorts around the globe worth $360 trillion. Those contracts could be anything from complex financial instruments to things rather closer to home – like a mortgage rate.

So when suspicions arose that the rate was being manipulated it sparked investigations by regulators in London, New York, Brussels and Tokyo. As well as Barclays, they are looking at HSBC and RBS (yes, them again) in the UK as well as Citigroup in the US and UBS in Switzerland.

The allegations centre on whether individual traders at the banks tried to fix the rates so they could make (and win) bets on the markets and, separately, whether banks artificially reduced the rates at which they said they could borrow in an effort to make them seem stronger: this was alleged to have happened during the banking crisis which followed the collapse of Lehman Brothers in 2008. At the time banks were very concerned that they didn't look vulnerable (which would have been shown by them having to pay higher rates to borrow).

In fact the statement from the US regulator today says Barclays sought to manipulate the Libor submissions “sometimes on a daily basis” over a four year period from 2005 to 2009.

The investigations continue into other banks and also whether there were attempts to fix another key rate, Euribor, in Brussels.