Large Bank LIBOR Liabilities; A Look At Fines Paid To Date


Bernstein Research published a report titled “Large-Cap Banks: An Early Look at LIBOR Liabilities” on Tuesday, May 27th. In the report, analysts John E. McDonald, Ian Weber and Steven Wald make an effort to assess the ongoing fallout from the international LIBOR rate fixing scandal, and the impact on American large-cap banks such as Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C) and JPMorgan & Chase Co. (NYSE:JPM).

McDonald et al outline their perspective in the overview of the report. “With several of the world’s largest banks looking to resolve their exposures to global regulators for benchmark rate wrongdoing, we think that the banks’ main priority will be to resolve their exposures to penalties from regulators and then turn their focus towards private lawsuits, which is pretty much the opposite of what we saw with mortgage-related litigation and penalties. Similar to FX, we maintain that it’s still early days for our banks with regard to Libor, but we continue to monitor the progress as we view Libor as one of the remaining “big ticket” legal items that the universal banks will need to resolve before a fading of elevated legal costs can gain traction.”

Explaining LIBOR rate-fixing scandal

LIBOR is a benchmark interest rate based on the rates which banks lend unsecured funds to each other, and “rigging” it would give an edge to in-the-know bank traders. In an investigation beginning in 2012, 16 global financial institutions have come under investigation by national financial regulatory authorities—including those of the United States, UK, Switzerland, Canada, and Japan—for conspiring to manipulate the LIBOR rate on multiple occasions between 2005 and 2009.

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Fines/settlements paid by banks to date

The Bernstein Research report points out that “all of the known reference rate-related payouts for alleged manipulation have come from government fines or penalties. While a multitude of private lawsuits have been filed against banks for reference rate rigging, we have only seen Barclays PLC (NYSE:BCS) (LON:BARC) settle disputes with private plaintiffs.” The analysts also highlight that U.S. banks have not paid out any private party claims to date.

As Exhibit 2 above illustrates, so far, Barclays PLC (NYSE:BCS) (LON:BARC) at just over $450 million, UBS AG (NYSE:UBS) at around $1.5 billion, Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) at close to $1.1 billion and Rabobank also at $1.1 billion have been the only financial institutions to settle or pay out penalties to major global regulators regarding reference rate manipulation to date.

Given that a large chunk of the settlements so far were paid to the U.S. DOJ and the CFTC, and since no U.S. bank has yet settled with domestic regulators for LIBOR-related allegations, the analysts suggest that American regulators may be pushing for large penalties for U.S. banks.