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Question:


How does the Barclays scandal affect the average American?
-EddieT


Answer:


It’s too early to tell what the full extent of the fallout from the scandal will be, but it could have a significant impact on homeowners and other borrowers. More than half of the adjustable-rate mortgages in the United States, as of 2008, were tied to Libor (not sure what Libor is? See the previous "Ask the Expert" question). A typical mortgage might be priced at three-month Libor plus 3.5 or 4 percentage points. Rates on many credit cards are also pegged to Libor. Any manipulation would artificially raise or lower mortgage and other rates. What’s interesting about the scandal and seldom mentioned is that because banks are thought to have understated the rates that they pay on loans, resulting in an artificially low Libor, borrowers with rates tied to Libor might have gotten a break.

 

Such a benefit could prove short-lived, however. Although its impact would be hard to gauge, the scandal could exacerbate an erosion of faith in banks, the financial system and Wall Street, depressing prices of assets like stocks and bonds. A more concrete potential consequence of Libor manipulation is that spreads on loans tied to Libor could rise if banks decide that they can’t trust the stated value of Libor. They may be inclined to charge an extra quarter or half percentage point, say, on new loans. That’s just speculation, of course. The story is still unfolding. Like many others involving banks in the last five years, it could be quite a while before the final chapter is written.

-Conrad de Aenlle



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