The ripple effects from the announcement by the British Financial Services Authority (FSA) that it was fining Barclays Bank for manipulating in its favor a key interest rate are just beginning to be felt. Explained the authority:
The London Interbank Offered Rate (“LIBOR”) and the Euro Interbank Offered Rate (“EURIBOR”) are benchmark reference rates fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.
LIBOR and EURIBOR are by far the most prevalent benchmark reference rates used in euro, US dollar and sterling over the counter (“OTC”) interest rate derivatives contracts and exchange traded interest rate contracts.
The notional amount outstanding of OTC interest rate derivatives contracts in the first half of 2011 has been estimated at 554 trillion US dollars… (emphasis added)
Let’s put that into simple terms: the LIBOR and the EURIBOR rates affect financial instruments with values more than 36 times the gross domestic product of the United States! These are rates that affect nearly every contract that contains or refers to an interest rate. That would include variable-rate mortgages, municipal bond financings, credit card debt, U.S. treasuries — an enormous, almost incomprehensibly large number.
And all of it manipulated by Barclays and 18 other “money center” banks operating out of the exclusive City of London enclave in the center of London, England.
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Photo: Main entrance, the British Financial Services Authority (FSA) building, London