Libor fixing ‘beneficial’ for mortgage borrowers
Artificially low rate would have benefitted borrowers but consumers would have lost through hit on pension and insurance funds.
The manipulation of the London interbank offered rate would have been beneficial to mortgage borrowers as it would have kept lending rates artificially low, though consumers have lost out overall due to the losses incurred by pension and insurance funds, a mortgage expert has said.
Cumulative losses for institutional investors by banks manipulating Libor would have been “quite substantial” as money market instruments linked to Libor equate to around $350,000bn (£225,000bn), according to Ray Boulger, senior technical manager at broker John Charcol told FTAdviser.
Last week, the regulator fined Barclays a record £59.5m for misconduct relating to the London Interbank Offered Rate and the Euro Interbank Offered Rate.
It has since emerged that a number of banks are being investigated by the Financial Services Authority for manipulating Libor, including Royal Bank of Scotland, Lloyds, UBS and Citigroup.
Mr Boulger said: “Where the rate was falsified, meaning it would have been lower than it should have been, means it would have had an impact on mortgages.
“Mortgage borrowers would have been paying less than they should have been and not more. So any impact on mortgage borrowers would have been beneficial.”
However, where someone gains, another person loses. According to Mr Boulger, the people that would have lost out are those that had either invested in deposits with the bank at a rate linked to Libor or invested in money market instruments where the rate was dictated by Libor.
He said: “So we are talking here not about the average consumer but about institutions who have large amounts of money – tens of millions or maybe even hundreds of millions of pounds - invested either on deposits with the bank or even in residential mortgage-backed securities.
“Those investors would have lost out and to the extent that those investment funds will ultimately be for the benefit of the ordinary consumer, be it a pension fund or an insurance fund, that’s where the consumers, in my view, would have lost out.”
He highlights that for the individual consumer, the detriment would be “quite small” but that the cumulative impact of a few basis points on that over a few months would have been “quite substantial”.
Mr Boulger said: “You could equate it to a clever fraudster who is working on the inside of a bank who is siphoning off small amounts from a large number of customers... so small that the borrowers tend not to notice but overall that fraudster is actually receiving a large amount. That is one way of looking at it.”