Five ways big banks' Libor scandal affects you
London, this year's host of the Olympics, is also home to a bank scandal that threatens to rock the financial world as much as the Games influence the world of sports. Here's why: Libor (London Interbank Offered Rate) is a global benchmark for interest rates that reaches deep into the international financial system. Allegations that banks rigged those rates means that everyone from mortgage-holders and indebted students to cities and mutual funds may have had their interest rates unnaturally altered. Already tainted by other scandals, banks are under investigation because of charges that they profited illegally from their rate-rigging scheme. The mess further taints big banks and puts more strain on the credibility of the global financial system. Here are five ways the Libor scandal could affect you:
1. As an investor
The name London Interbank Offered Rate (Libor) is geographically misleading. It is simply the interest rate that banks around the world charge to lend to each other. It is computed in London but reflects the borrowing costs of 18 banks, including firms in Europe and Japan as well as three American institutions: Bank of America, Citigroup, and JPMorgan Chase. Used as a global benchmark for interest rates, it has by some estimates affected more than $360 trillion in financial products. The banks, not the market or the government, set the rate.
Among the big losers are investors, because some financial products are based on Libor. Several mutual-fund companies, including Vanguard Group Inc., are looking into whether their funds have been harmed by alleged interest-rate rigging by large banks. Money market funds and bond funds are two areas of focus. Hedge funds are also said to be looking at taking legal action.