So you’ve got that loan from your bank, signed all the documents they presented to you, gave them all the security they wanted, or at least all you have (the two amount to the same thing anyway – you will have nothing left!) and now you know what you will have to pay.
Not quite! Your payments will contain a bit of capital repayment and normally a bigger bit of interest. That latter will be based on LIBOR, the London Interbank Offered Rate, or the rate at which banks borrow from one another, or lend to one another. It could be the Sterling LIBOR, or the Euro LIBOR, a Dollar LIBOR, a Yen LIBOR or a LIBOR of some other currency. To that, they add their margin i.e. what the bank gets by way of a price for the money they are lending you.
So your interest charge is likely to be composed of: (i) LIBOR plus (ii) your margin, nowadays anything from 1½% to seven or eight percent, depending on what he or she thinks he/she will get away with. And then there was, and may be there still is (iii), the infamous Northern Ireland premium, which should never have existed but it did, normally at 1%. It seems to have partially disappeared in recent times, but it was always of questionable legality.
Now you know what you should have to pay, but that is not necessarily what you will be paying. The bank will now determine what you will pay and you will never know whether it is right or wrong. It doesn’t matter whether it is for your home, or for that second house you always wanted, or for your new car or your business, you are now in the hands of some banker, somewhere – normally someone you never met, who has no idea what you can afford, but who has a computer and can calculate your interest liability in whatever way he can get away with. You are unlikely to know whether he is using the right LIBOR, or an inflated one. In the dim and distant past, banks and bankers were honest; they used the right LIBOR figure.
But just look at what has happened in recent years. Barclays were fined £290 million for fiddling LIBOR in June 2012, for offences which went back to 2005 and Bob Diamond, their Chief Executive had to resign. Royal Bank of Scotland (the parent bank of our Ulster Bank) was fined £390 million for that same caper in 2013. Deutsche Bank was fined a record £1.7 billion earlier this month; bosses in UBS, Switzerland’s best known bank, told their staff to do it and they did and one of their dealers, Tom Hayes was charged with it; and of course Anglo was at it too, but they were never charged. Then there is the foreign exchange rigging. That must be worth another blog – there were too many involved in that to include it here. To misquote a former Irish politician “That’s banks for yeh.”