How Lloyds bit the hand that fed it

Outlook: Even so, its £105m fine amounts to little more than a rounding error to Lloyds

It has been billed as Lloyds’ Libor fine through a series of carefully placed leaks over the past few days. Turns out Lloyds’ traders were doing something far worse than playing fast and loose with the benchmark rate to keep them in bottles of Bollinger.

In the depths of the financial crisis the Bank of England cooked up what became known as the Special Liquidity Scheme. This allowed banks to swap things they couldn’t get off their books (such as mortgage debt) for things they could (UK Treasury Bills).

That was just as important as the bailouts that rescued Lloyds, and RBS, because it prevented the entire financial system from grinding to an inglorious halt during the darkest days of 2008.

For this service – and about £200bn was loaned to the industry via the scheme – the Bank of England quite rightly demanded a fee. It’s just that Lloyds didn’t want to pay it, preferring instead to bite the hand that was feeding it.

In the run-up to the date at which the fees became due, two of its traders fixed something called the repo rate benchmark. In English, that is the interest rate that the Bank of England uses to buy back government securities from commercial banks.

Now based on the raw numbers, Lloyds’ fine doesn’t look all that big. That’s because as far as Americans are concerned Lloyds was a fairly small player in the activities that made them cross. The UK part of the penalty, however, is the third biggest levied by a UK financial watchdog, and the second biggest over rate fixing. The FCA noted that the misconduct was of a type we haven’t seen in previous Libor cases. It was, in fact, a new low.

Even so, its £105m fine amounts to little more than a rounding error to Lloyds. The bank’s earnings for just six months are expected to come in at £3.5bn, depending which of the three or four different figures it quotes you care to use.

Sir Richard Lambert thinks that if bankers had to swear a sort of banking hippocratic oath at the start of their careers, along the lines of the one doctors swear (or used to), it might help to stop this sort of thing from happening in the future. Hearing a few four-letter oaths from bankers in the dock upon hearing their sentences might prove to be rather more effective.