Thursday, 28 June 2012

Did Barclays scandal hit homeowners?

There have been a few suggestions that homeowners with mortgages may have lost out because of the attempted manipulation by Barclays dealers of the LIBOR rate between 2005 and 2010.

I think you have to be careful with this because:

*Only a small proportion of mortgages are directly linked to LIBOR, perhaps 250,000 loans to buy-to-let borrowers and some to sub-prime customers.

*As for other variable rate mortgages, LIBOR could influence a lender's cost of funds but the impact is less direct.

*It appears that before the credit crunch banks may have been over-quoting and under-quoting LIBOR in order to make dealing profits. In theory this could have pushed some people's mortgage costs slightly higher or slightly lower.

*However the more significant attempts at manipulation may have come after the credit-crunch, from 2007, when under-quoting appears to have been the main problem. If that had any impact at all it would have been to reduce the cost of variable-rate mortgages.

*From that point, in any case, lenders were having to depend much more heavily on savers' deposits to fund mortgages, because they couldn't raise money in the financial markets where LIBOR is a key reference rate - so LIBOR became less important for mortgage rates.

Mortgage experts suggest the net effect of the shenanigans could well have been to lower people's mortgage costs - though that might not be true for all customers throughout the period.

If that's true, the real victims would be the institutions who deposit money with banks for short periods at rates which are linked to LIBOR - pension funds, local authorities, hedge funds and private equity firms.

If LIBOR was manipulated down, they would have have lost out directly.

For details on what LIBOR is and how it's calculated, look here.

1 comment:

  1. Thanks Simon for posting those helpful links which show which branches are being transfered to the Co-op. I'm with Smile and it has been very helpful to learn that one of the three Lloyds TSB branches in my town (a TSB, Lloyds and Halifax)will become a Co-op branch next year. Current nearest is 16 miles away.

    Hopefully a new ethical bank in the town will encourage more local residents to part company with the big boys/sharks.