Since late 2010, some banks that help set interbank lending rates have been under the purview of investigation commissions. Regulators, investigating manipulations in the London Interbank Offered Rate (LIBOR), Tokyo Interbank Offered Rate (TIBOR) and Euro Interbank Offered Rate (EURIBOR) in London, Tokyo and Europe during 2006-2008 financial turmoil, are now focused on probing global banks.
LIBOR is used as a reference rate for financial products all over the world. British Bankers’ Association (BBA) sets LIBOR on a daily basis for short-term borrowing in 10 currencies. The four highest and lowest reported rates are removed and the remaining is averaged to set the LIBOR rate.
Regulatory authorities are working on to resolve whether overnight rates during the global financial crisis were conspired by banks or not. Moreover, traders at different banks have been accused of setting rates to gain from derivatives related to those rates.
Investigation agencies working on this issue include U.S. Securities and Exchange Commission (SEC), U.S. Commodity Futures Trading Commission, U.S. Department of Justice, Japan’s Financial Supervisory Agency and the U.K. Financial Services Authority. The European Union antitrust regulators and the Swiss Competition Commission are also examining LIBOR rates. Canada's Competition Bureau is also helping with global investigations on LIBOR probe.
Regulators’ have requested co-operation from inter-dealer brokers to expand the extent of global investigation related to manipulation in interbank rates. Further, these regulators have pointed errors in banks’ internal controls, which led to exploitation of rates worldwide.
The investigators are trying to find out whether some banks intentionally tried to hide gains in their funding costs by submitting inaccurate data to BBA during the financial crisis. This investigation had been going on for quite some time.
Many witnesses were interviewed by the U.S. and U.K. regulators. All 16 banks that were in the committee helping BBA to set the dollar LIBOR in 2006-2008 were informally requested for providing information.
The US, European and Japanese banks’ traders who have been suspected for manipulation include Bank of America Corporation (BAC), Citigroup Inc. (C), JPMorgan Chase & Co (JPM) UBS AG (UBS), Royal Bank of Scotland (RBS), Deutsche Bank AG (DB) and Barclays PLC (BCS).
These banks have come up with suspension of a number of traders involved in manipulation of interbank rates associated with international probe. Moreover, banks are in full co-operation in providing information to these regulatory investigation committees.
During the period of the investigation, the three-month lending dollar LIBOR spiked to 5.72% in September 2007 and 4.81% in October 2008. Also, the daily spreads between the banks widened due to concerns over counterparty risk.
At that time, weak banks had to borrow at a very high rate due to lack of confidence in the market. This increase in LIBOR rates was criticized during that time for not reflecting the actual market prices.
The BBA did say, in 2008, that it would enhance governance and scrutiny procedures on the rate. A thorough investigation and a proper judgment in this case are very much required, as various banks all over the world depend on LIBOR to set their lending and borrowing rates.
However, it might not be as bad as we anticipated. In fact, the completion of investigations will give a clear picture of the banking industry to the investors. Additionally, this might help the financial institutions to prepare for another financial crisis.
BANK OF AMER CP (BAC): Free Stock Analysis Report
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CITIGROUP INC (C): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
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ROYAL BK SC-ADR (RBS): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
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