In her recent blog post Liina reported on the emerging Libor (London Interbank Offered Rate) scandal. A lot has happened since this story hit the headlines. We have seen senior bank executives called before Parliament, extensive public debate regarding the role of banks in society and just last week both the Crown Office in England and the Procurator Fiscals service in Scotland announced that investigations in to potential criminal liability emerging from the Libor fixing were ongoing.
The question to be addressed in this post is how the distortion of Libor could affect our clients and the types of claims we are dealing with on a day to day basis. Libor is the interest rate that banks pay on money they borrow from one another. Libor is also used to determine the interest rates that are applied to loans, including some mortgages, credit cards and business borrowing. Indeed in many of the banking agreement we have seen, Libor is not just used as the basis for calculating interest, it is often the Libor rate that is simply applied.
We know that there were times when Barclays and other banks sought to artificially raise the Libor rate. In these circumstances businesses and individuals may have been overcharged interest. Overcharging interest based on Libor is not a new phenomenon. The Libor rate provided to borrowers by banks is often not the true Libor rate - which is constantly subject to change and notoriously difficult to calculate. A borrower seeking to challenge the rate applied to their borrowing needs to demonstrate the true rate. This is currently a difficult and technical process, and it will be interesting to see if the regulator publicises the true Libor rates in the near future.
When the rate was artificially lowered, borrowers might have gotten better deals on their borrowing. However there is a flip-side to this. Libor based investments would suffer. We are already seeing the beginnings of litigation for investment losses in the United States. Many cities in American had their public service pensions and investments in Libor linked schemes. The city of Baltimore is one of the first to bring such proceedings. At present the city’s loss is still undetermined, largely due to the nebulous nature of the true Libor rate, but estimated to be in the high hundreds of thousands and possibly millions of dollars.
Interestingly many of the cities and organisations seeking to raise such actions are actively shunning the class action approach and are opting to raise their claims independently in the knowledge that each action is a new and costly front for the banks to defend on.
The outcome of such litigation is uncertain with the true extent of any losses still unknown until the true Libor rates become know. It will be interesting to see how these cases develop and whether there is any appetite for these types of actions in the UK.
We hope that the process of calculating the true Libor rate will become more straightforward, which would help claims based on Libor significantly. Over the next few months we expect to see an increase in the availability of expert input for determining the true Libor rates which should have been applied to borrowings and investments; this will be a significant step in the process of bringing the banks to book.
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