Libor Spotlight Falls on Critical Days in 2008

The appearance of Bob Diamond, the departed chief executive of Barclays, before a UK Treasury select committee on Wednesday will focus attention on movements in the London interbank offered rate over a crucial two-day period at the height of the financial crisis in 2008.

Bob Diamond
Bob Diamond

On October 29 2008 Mr Diamond as chief executive of Barclays Capital had a telephone conversation with Paul Tucker, deputy governor of the Bank of England, regarding the high level of Barclays’ Libor submissions.

On that day, Barclays had submitted a rate of 4 percent for three-month Libor, well above its fellow panel members who help set the benchmark borrowing level. The three-month benchmark for Libor is the main floating rate for interest rate swap contracts and is a crucial reference point for the vast derivatives market.

The next day, Barclays submitted a three-month Libor of 3.4 percent, marking a decline of 60 basis points, the biggest change among the panel members who contributed submissions to the British Bankers’ Association.

Among its major global banking rivals, HSBC lowered its three-month Libor submission from 3.4 to 3.15 percent, Lloyds from 3.35 to 3 percent, RBS from 3.6 to 3.3 percent, UBS from 3.4 to 3.2 percent, CreditSuisse from 3.55 to 3.15 percent and Deutsche from 3.45 to 3.25 percent.

That resulted in the overall three-month Libor being set at 3.1925 percent on October 30, down from the prior day’s level of 3.42 percent.

In contrast, other measures of short-term funding which are linked to three-month Libor did not change as much during the two-day period – suggesting that the banks had lowered their submissions much further than the other market indicators of short term financing.

For example, the December Federal funds future contract only dropped 9 basis points from 83.5bp to 74.5bp over the same period, lagging the decline in official Libor submissions.

A key measure of risk in the interbank lending market, the overnight index swap rate (OIS) versus three-month dollar Libor also registered a smaller drop. The three-month OIS declined from 84.85 basis points to 77.85 basis points, a fall of 7 basis points ahead of the Libor submissions on October 30.

This was not the first time that the banks’ Libor submissions changed noticeably in response to scrutiny.

Earlier in 2008, when potential Libor rate manipulation first came to media attention, banks also changed their submissions promptly.

“Many of the bank quotes actually decreased while the spreads on a wide variety of instruments increased. Finally, when allegations of potential manipulation were published on April 17, these patterns shifted again,” Rosa M Abrantes-Metz, Michael Kraten, Albert D Metz and Gim S Seow, wrote in a 2008 academic paper published on the website of Social Science Research Network, the research organisation.