In the world of interconnected global finance, when a trader in London uncorks a bottle of Bollinger champagne to celebrate a rate change, there is a decent chance your monthly loan payment also changes in Any Town, U.S.A.
The rate-rigging scandal at London-based Barclays bank will eventually hit home for American consumers -- at least in theory. Everything from adjustable-rate mortgages to private student loans and variable-rate credit cards is linked to the Libor rate, which Barclays -- and other major banks still under investigation -- allegedly tried to influence.
To be sure, there is no evidence yet that Barclays' efforts to manipulate the Libor rate have affected American consumers. Libor, which stands for London interbank offered rate, is the rate that banks use to make short-term loans between themselves. It is calculated daily as an average of 18 banks' rates, with the highest and lowest rates tossed out of the mix. That makes it difficult for any single bank to influence the rate, said Greg McBride, senior financial analyst for Bankrate.com.
"The wrongdoing is the attempt to manipulate," he said. "Whether [Libor] was influenced is very unlikely."
But according to the Justice Department, Barclays' multiple efforts to depress the rate in order to boost its own bottom line were sometimes successful. Last week, the bank came to a $450 million settlement with regulators over the charges following a multiyear investigation. In the wake of the settlement, the bank's CEO, Robert Diamond, resigned this week.
The Libor rate is also the rate that some lenders link to some adjustable-rate products. The banks' alleged attempt to manipulate the Libor rate underscores how closely the financial health of American consumers could be tied to the profits made at corporate banks.
For example, when Libor goes up, associated interest rates and monthly loan payments can also rise. When Libor goes down, adjustable-rate loans could also have lower payments. There's no direct impact on fixed-rate loans.
Nearly half of private student lenders -- including Sallie Mae -- offer variable-rate loans linked to the Libor index, according to FinAid, a student loan information website. In addition, all the top mortgage lenders in the United States, including Bank of America, JPMorgan Chase and Wells Fargo, also use Libor to calculate the amount of interest charged on adjustable-rate mortgages -- or ARMs, according to The New York Times.
For consumers, the only way to know if a loan is tied to Libor is to read the terms of the original loan agreement. Many adjustable-rate loans are tied to other indices such as the prime rate.
In 2008, some American borrowers with ARM mortgages saw the amount of their payments spike because the Libor rate increased, according to an October 2008 USAToday story.