TheFinancial Times recently reported that regulators investigating manipulations in the London Interbank Offered Rate (LIBOR) during 2006-2008 are now focused on probing five global banks.
Four of these banks – Bank of America Corporation (BAC), Citigroup Inc. (C), UBS AG (UBS) and Barclays PLC (BCS) – have received subpoenas. Though the fifth bank, Germany’s WestLB AG, did not receive a subpoena, investigators have demanded information from it.
The agencies involved in the probe include the US Securities and Exchange Commission (SEC), the US Department of Justice, the Commodity Futures Trading Commission, the UK Financial Services Authority and the Japanese Financial Supervisory Agency.
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. Banks quote rates at which they believe that they can borrow. The four highest and lowest reported rates are removed and the remaining are averaged to set the LIBOR rate.
The investigators are looking into 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 information. Now the probe has been narrowed down to above mentioned five banks.
During the period of investigation, the three-month lending dollar LIBOR had spiked to 5.72% in September 2007 and 4.81% in October 2008. Also, the daily spreads betweens 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 market confidence. This increase in LIBOR rates was criticized at that time for not reflecting actual market prices.
The BBA did say, in 2008, that it would enhance governance and scrutiny procedures on the rate. Four more banks were also added earlier this year to contribute their date to the LIBOR.
A thorough investigation and a proper judgment in the case are absolutely required, as various banks all over the world depend on LIBOR to set their lending and borrowing rates.
BANK OF AMER CP (BAC): Free Stock Analysis Report
BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
Zacks Investment Research
