On Wednesday, European Union antitrust officials penalized 8 major international banks, accusing them of manipulation of benchmark interest rates. The total penalty amount summed to $2.3 billion (€1.7 billion). However, fines imposed on banks were reduced by 10% upon conforming to the settlements.
The list of accused banks include Wall Street biggies – Citigroup Inc. (C - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report), The Royal Bank of Scotland Group plc (RBS - Snapshot Report) and UK banking giant – HSBC Holdings plc (HSBC - Analyst Report). These banks were charged with allegations of fixing the London interbank offered rate (LIBOR) and the Euro interbank offered rate (EURIBOR). Such scandals affected contracts worth hundreds of billions worldwide, ranging from mortgages to credit card bills.
The European Commission is the latest regulator to fine banks for making profits out of interest rates manipulation with the formation of cartels. Previously, regulatory authorities in the U.S. and the UK came down hard on such unwarranted activities of banks including Barclays PLC (BCS - Analyst Report), UBS AG (UBS - Analyst Report), Rabobank, broker ICAP and Royal Bank of Scotland Group. These banks reached an agreement by paying penalties of an aggregate of $3.7 billion and also admitted to their wrongdoings.
The EU authorities investigated banks which flouted EU laws forming cartels and collusive activities. The participants in cartels include Barclays, Deutsche Bank AG (DB - Analyst Report), Royal Bank of Scotland, Societe Generale, Credit Agricole, HSBC, JPMorgan, UBS AG and Citigroup.
The first cartel operated from 2005 to 2008 and was related to euro-denominated derivatives. For participating in this cartel, Deutsche Bank was fined €468 million, Societe Generale €445 million and RBS was penalized €131 million.
However, Barclays was spared from a fine worth €690 million owing to its cooperation with investigators to provide information about the involvement of other banks in the cartel. Notably, JPMorgan, HSBC and Credit Agricole have not come up with settlements.
According to the EU Commission, the second cartel operated from 2007 to 2010 and was related to yen-based derivatives. For participating in this cartel, RBS and Deutsche Bank were each fined €260 million, while JPMorgan, Citigroup and RP Martin – the brokerage firm was penalized €80 million, €70 million and €247,000, respectively.
However, UBS AG was exempted from a fine worth €2.5 billion for divulging information related to the existence of the cartel. Citigroup also evaded charges of €55 million for its cooperation.
LIBOR and EURIBOR are widely accepted benchmark rates. Several financial institutions, mortgage lenders and credit card agencies lay down their own rates in relation to it. Derivatives and other financial products are connected to these rates.
Therefore, manipulation of benchmark interest rates by major financial institutions triggered thorough investigations by regulatory bodies across Europe, Asia and America. Investigations revealed huge scams with nearly $300 trillion of loans, mortgages, financial products and contracts being linked to the tampered interest rates.
Regulatory authorities are investigating the matter and plan to put forward a landmark judgment so as to terminate such shrewd practices in future, bring justice to the sufferers and punish the wrongdoers. While the settlements will put to rest a long-drawn investigation and banks can breathe relief, this comes as a huge blow to their financials. Further, such settlements could be called exemplary and trigger similar settlements by other banks depending on the charges against them.