Traders suspended in Libor probe – how does this affect you?

The swiss bank UBS has suspended some of its most senior traders – according to an article in today’s Financial Times.

Internationally, regulators (North America, Europe and Japan) are probing into the possibility of collusion and manipulation by US and European banks of interbank borrowing rates – notably the London Inter Bank Offer Rates or LIBORs – this is the latest controversy to hit a number of banks since the financial crisis.
A number of traders have been fired or suspended and banks affected include UBS, Royal Bank of Scotland, Deutsche Bank, JP Morgan Chase and Citigroup.

The LIBOR Interbank offer rates serve as a reference for some $350tn of financial products. Other rates include the London yen rate known as Yen LIBOR and the Tokyo rate known as TIBOR.

WHY DOES THIS MATTER?

If you are a borrower, seeking to use lender funds to provide a mortgage secured on property, then the LIBOR rate definitely does matter.

Even if you are simply wanting to get a mortgage for your main home (residential) then the rate at which banks finance houses and other lenders actually lend to each other, will indirectly affect the rate which they will be able to offer you.

If you are seeking to obtain UK finance to acquire UK property for rental investment purposes (buy to let) then it is possible you will be offered loan finance at a rate which is directly linked to LIBOR plus a margin. Commercial mortgage finance is invariably offered with LIBOR linked rates in the UK.
If you are the type of investor who prefers investing in less mainstream, more risky ventures which may result in potentially much higher returns, then you may have invested in hedge fund style opportunities.
Hedge Funds place big “bets” on the way markets will play out in response to particular events or themes.

Some hedge funds focus on particular equity investment opportunities while others – you’ve guessed it – focus on shifts in bank rates and inter bank trading rates.

Some combine a number of areas.

Regulators have now expanded their inquiries into hedge funds in relation to their interest in movements in LIBOR and other key borrowing rates as well as the interdealer brokers that act as go betweens with bank trading desks.

More news will definitely become available as the regulator inquiries continue. It is not certain what the eventual fallout or repercussions will be.
But what does appear clear is that whatever the outcome – for the borrower and investor alike – this stuff matters to all of us.

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