Barclays Fine Signals Fraud In $350 Trillion Lending Market (Update 1)

Already, the process of setting the rates, which is governed by the British Banking Association, has been criticized as being too opaque and giving far too much power to the world's largest banks. Banks are polled on the costs to borrow from each other in different currencies like the dollar, yen, euro and Swiss franc for 15 different periods, from overnight to one year. Some high and low quotes are excluded, with remaining bids averaged and set by the BBA.

In the Department of Justice's settlement, it said on Wednesday that, "Barclays has admitted and accepted responsibility for its misconduct." The agency also added that a criminal investigation into the manipulation of Libor and Euribor by other financial institutions and individuals is ongoing and that its settlement with Barclays compels the bank to continue its cooperation on that investigation.

Barclays settlement may be the first in a series of regulatory penalties that may be handed out to banking giants like HSBC(HBC) , Citigroup(C) , The Royal Bank of Scotland(RBS) and JPMorgan(JPM) .

"Because mortgages, student loans, financial derivatives, and other financial products rely on LIBOR and EURIBOR as reference rates, the manipulation of submissions used to calculate those rates can have significant negative effects on consumers and financial markets worldwide," said Assistant Attorney General Lanny Breuer, in a statement.

Libor, or the London Interbank Offered Rate is a key reference rate for short-term bank funding, interest rate swaps, corporate bonds and even consumer financial products like adjustable rate mortgages.

The DoJ's investigations have ties to a financial crimes task force launched by President Barack Obama in January.

In addition to masking true crisis-time borrowing costs, keeping overnight interest rates artificially low or unfairly high could have also helped banks keep payments on derivatives like interest rate swaps from spiking, while also stopping consumer financial products like adjustable rate mortgage rates from rising.

Meanwhile, the manipulation of the rate may have minimized the banks payments due to corporations and municipalities who swapped fixed rate debt payments for floating rate contracts.

Breuer credited Barclays with its efforts in assisting the DoJ's Criminal Division in an ongoing investigation of "individuals and other financial institutions," related to market manipulation.