Back to top

Major Blow for Big Banks

Read MoreHide Full Article

On Wednesday, Benjamin Lawsky, superintendent of New York’s Department of Financial Services (DFS) was the latest regulator to order currency probe amid the widespread global investigation into alleged foreign exchange manipulation. The regulator has demanded documents related to currency trading practices from a number of major banks.

These banks include Deutsche Bank AG (DB - Free Report) , The Goldman Sachs Group, Inc. (GS - Free Report) , Lloyds Banking Group plc (LYG - Free Report) , Credit Suisse Group AG (CS - Free Report) and The Royal Bank of Scotland Group plc (RBS - Free Report) among several others. All the banks have refrained from issuing comments.

Manipulation of benchmark interest rates by major financial institutions triggered thorough investigations by regulatory bodies across Europe, Asia and America. Such investigations have cost several major global banks billions of dollars in settlements. We see these scandals denting the financials of these banks over the long term.

Notably, financial regulators in Switzerland and the UK are already investigating the role of the banks in the manipulation of currency rates. The foreign-exchange rates aid fund managers to assess the apparent day-to-day value of investments.

Regulators are of the opinion that banks’ traders had fixed artificial benchmark foreign exchange rates after consultations among themselves or have pushed through clients’ orders to obtain better rates for their own orders to make profits.

Therefore, burdened under the pressure of such investigations, banks have terminated a number of traders along with the closure of electronic chat rooms – the mode of communication between different banks. Moreover, such probes are negatively impacting the markets as evident from the downturn in foreign exchange trading volumes in recent months.

Last year in December, 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 big-time Wall Street players Citigroup Inc. (C - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) , RBS and UK banking giant HSBC Holdings plc (HSBC - Free 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.

Regulatory authorities are investigating scandals related to the heightening foreign exchange rate fixing and are determined to put forward a landmark judgment to terminate such practices in future. While the settlement of such issues will put to rest a long-drawn investigation and bring reprieve to the banks, this marks a blow to their financials.