Latest scandal: Barclays Bank and the Libor Rate
LOL: The Sun breaks the news of Bob Diamond's resignation
Barclays' chief executive Bob Diamond has resigned, less than a week after the bank was fined £290m ($450m) for trying to manipulate a key bank lending rate called Libor.
But why is Libor so important? Here we take a closer look at the issues involved:
Why do banks lend to each other in the first place?
Banks lend to each other on a short-term basis to either make a profit or cover any short-term cash shortfalls on the part of the borrower.
For example, a bank may find that at the end of a certain day more customers have made withdrawals than deposits. And so it borrows from its rivals to cover the shortfall.
Conversely, banks with a cash surplus can make extra profits by lending funds to a rival. The average rate of interest paid by the banks in such interbank lending is called the London Interbank Offered Rate (Libor).
What exactly is Libor, and how is it calculated?
Libor measures how much banks have to pay to borrow from their rivals.
It is calculated on a daily basis by the British Bankers' Association from estimates submitted by the major banks of the cost of their own interbank lending.
The rate each bank has to pay is a reflection of their rivals' perception of its financial strength, effectively how much it is trusted.
Every day 16 banks submit the interest rate that they are charged to borrow money. The four highest rates and the four lowest rates are ignored. The average of the eight remaining rates makes up the Libor rate.
The higher the interest a bank has to pay to borrow funds, the less confidence the lending bank has in it.
In turn, this means that the Libor rate indicates the health of the wider banking sector. Libor has a European equivalent called Euribor, which plays the same role.
The graph above illustrates the difference between the Libor rate and Barclays' submission rate for a key period in 2008.
Shortly after Lehman Brothers collapsed, the Libor rate soared as anxiety about the banks grew. Prior to then, Barclays more or less shadowed the Libor rate. However, as worries about Barclays' strength grew, it was being charged a higher rate than that for the banks overall.
Later in October, the difference in the rate being charged by Barclays and the main Libor rate fell dramatically. This coincided with a conversation between Bob Diamond and deputy Bank of England governor Paul Tucker about the difference between the two rates.
Why is Libor so important?
The Financial Services Authority (FSA) says Libor and Euribor are "benchmark reference rates fundamental to the operation of both UK and international financial markets".
The prices of trillions of pounds worth of financial transactions around the world are set according to Libor.
Among them, financial swap deals worth £225tn are indexed to Libor, and loans totalling £6.4tn, the British Bankers' Association says.
What happened at Barclays?
Staff at Barclays filed misleading figures for interbank borrowings they made.
Firstly, between 2005 and 2008 - and sometimes working with traders at other banks - they tried to influence the Libor rate - so as to try to boost their profits.
Then between 2007 and 2009, at the peak of the global banking crisis, Barclays filed artificially low figures. This was to try to hide the level to which Barclays was under financial stress.
How could the actions of Barclays' traders affect me?
As already discussed, the Libor rate is determined from the banks telling the British Bankers' Association their own interbank lending rates. It goes into a pot with figures from other banks to work out the daily rate.
Any change in that main rate could feed through the financial system to make loans, mortgages or credit card interest rates more expensive, or cheaper.
While the FSA says its actions "could have caused serious harm" to others, the US Department of Justice goes further, saying that on some occasions the actions of Barclays staff did affect the rate.
The bank's chief executive Bob Diamond has now resigned from his job, along with Barclays chairman Marcus Agius.
Investigations are continuing across the banking industry, so more evidence is likely to emerge.
What investigations are now underway?
The FSA and US regulators are continuing their investigations. There are at least a dozen other banks being investigated, including Citigroup, UBS and RBS.
The Serious Fraud Office (SFO) is now looking into whether "it is both appropriate and possible to bring criminal prosecutions" and said on 2 July that it hoped to take a decision within a month.
In addition, Chancellor George Osborne has launched a review under Martin Wheatley, who will be running the government's new Financial Conduct Authority, to look at whether changes are needed to Libor.
It will consider whether the way it is calculated needs to be changed and whether it needs to be more tightly regulated. It will report later in the summer.
It will also look at whether the current civil and criminal sanctions relating to Libor are adequate and whether any other price-setting mechanisms also need to be reformed.
Finally, a joint committee of the House of Commons and the House of Lords is going to look into the lessons to be learnt from the Libor scandal in relation to "transparency, conflicts of interest, culture and the professional standards of the banking industry".
It was supposed to report by the end of the year, but Labour has opposed its establishment and Andrew Tyrie, the Conservative MP who was supposed to be running it, has said he is not keen to do so without cross-party support.
The Legal Stuff
This could potentially be very awkward for the current government, since a lot of their Party Donors come from the City.
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