A group of banks being investigated in an interest-rate rigging scandal are looking to pursue a group settlement with regulators rather than face a Barclays-style backlash by going it alone, people familiar with the banks’ thinking said.
Such discussions are preliminary and it is unclear if regulators will enter these talks, aimed at resolving allegations that banks attempted to manipulate the London interbank offered rate, or LIBOR, a benchmark that underpins hundreds of trillions of US dollars in contracts.
Still, there are powerful incentives for the banks to enter joint negotiations.
Barclays PLC was the first to settle with US and British regulators, paying a US$453 million penalty and admitting to its role in a deal announced on June 27. Barclays’ chief executive, Bob Diamond, abruptly quit the next week, bowing to public pressure and erosion of the bank’s reputation.
The sources said that none of the banks involved now want to be second in line for fear that they will get similarly hostile treatment from politicians and the public. Bank discussions about a group settlement initially took place before the Barclays agreement and picked back up in the aftermath.
It is unclear which banks are involved in the potential settlement talks. More than a dozen banks are being investigated in the scandal, including Citigroup, HSBC, Deutsche Bank and JPMorgan Chase. They all declined to comment.
A group agreement would appeal to financial watchdogs because they would be able to announce a headline-grabbing figure, showing that they were dealing firmly with the banking industry’s misdemeanors, a banker said on condition of anonymity.
Earlier this year, five top US banks negotiated a US$25 billion settlement with the US Justice Department and other federal and state agencies to resolve allegations of mortgage services abuses.
The key regulators involved in the LIBOR case include the US Commodity Futures Trading Commission and Britain’s Financial Services Authority. The commission was not available for comment and the authority declined to comment.
The main obstacle facing such a group settlement is a hesitancy on the part of the investment banks to work together in the fevered atmosphere surrounding the LIBOR investigations.
Negotiations and haggling could drag on for some time and a resolution was far from certain, the banker said.
That each bank possibly had to settle with a different group of regulators and that the charges were different in each case also made the chances of success of such a settlement small, a source at one of the banks being probed said.
However, if they were able to reach a group settlement it would enable them to share the pain of negative publicity.
Analysts have estimated that the scandal could cost the industry between US$20 billion to US$40 billion, further damaging a sector that is struggling to work its way through the aftermath of the 2007 to 2009 financial crisis, economic downturns in Europe and the US, and increased regulatory demands.
LIBOR rates are set daily in London for a range of currencies and maturities. Banks submit rates for unsecured loans to one another and the rates after high and low rates are thrown out, are averaged.
LIBOR rates underpin an estimated US$550 trillion in financial products, including consumer loans, mortgages, municipal bonds and corporate paper. They are also considered a gauge of a bank’s health. Investigators are looking at whether banks low-balled the rates to hide their borrowing costs in the 2007 to 2009 financial crisis and to profit on trades before the crisis hit.