Deutsche Bank AG DB could reach a settlement by this month, resolving a prolonged investigation over its alleged role in manipulation of the London Interbank Offered Rate (LIBOR). The company is in negotiation with the UK and the U.S. authorities including New York's financial services regulator to reach an agreement.
The German financial bigwig may shell out more than $1.5 billion, while the resolution may also include a criminal guilty plea from the bank’s UK subsidiary. The probable settlement will mark one of the last cases stemming from the Libor manipulation fiasco.
A Deutsche Bank spokesperson said, "We continue to work with the authorities that are reviewing interbank offered rates matters”.
Notably, last year Deutsche Bank faced €725 million fine by the European Union for its involvement in rigging the LIBOR and Euribor, the euro equivalent benchmark interest rate.
Libor manipulations by several banks have been detected by global authorities. Notably in 2012 Barclays PLC BCS admitted to its fraudulent practices and agreed to pay a penalty of $450 million for rigging the LIBOR. Also, during the same year, UBS Group AG UBS paid CHF 1.4 billion ($1.5 billion) to the U.S., U.K. and Swiss authorities to resolve claims of LIBOR fixing.
Several other banks that faced similar charges have settled these litigations in recent times, while Citigroup Inc. C and Bank of America Corporation could face stricter regulatory actions.
LIBOR – All You Need to Know
LIBOR is an important benchmark that financial institutions use to set the interest rates for lending purposes on numerous financial transactions. It is used to set interest rates in trillions of dollars worth of loans and investments. LIBOR is set by the British Bankers’ Association (BBA).
It is calculated for 10 currencies including the U.S. dollar. On a daily basis, the member banks submit a figure based on the estimation of what rate they would be charged when borrowing funds from other banks. Scrapping the highest and the lowest rate, LIBOR is calculated by averaging the remaining rate submissions.
It is alleged that banks were engaged in conspiracy to submit lower rates to the BBA for artificially suppressing LIBOR during the financial crisis. Higher rates would project the companies as financially weak, hence, the suppression of their rate estimations aided in presenting a secure financial health of the companies and benefiting from their investments in financial products tied to LIBOR during that period.
In the LIBOR rate-fixing scandal, the victims were primarily the public and private institutional investors, such as municipalities and pension funds. Institutional investors were hit as the bond market is heavily dependent on LIBOR. In a normal swap transaction, the investor exchanges the floating interest rate to bond investors for a fixed rate. The issue was that though institutional investors paid fixed rates to their banks, the floating rates they received in return were tied to LIBOR. Hence, on account of a suppressed LIBOR, institutional investors claim to have received diminished returns from these swap transactions.
Bottom Line
Deutsche Bank’s settlement amount is likely to surpass UBS Group, which paid the largest amount of penalty related to LIBOR manipulation charges so far. We believe the possible settlement will put to rest a long-drawn investigation and bring reprieve to the bank. However, it is likely to come as a huge blow to its financials. Also, it wouldn’t end the company’s legal woes. Among several other issues, the company is under investigation by regulatory and law enforcement agencies globally in relation to the misconduct concerning manipulation of foreign exchange rates.
Deutsche Bank currently carries a Zacks Rank #3 (Hold).
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