The Federal Deposit Insurance Corporation (FDIC) recently sued six major international banks and British Bankers’ Association, the trade group which supervises the Libor-setting process, accusing them of deceptive misrepresentation. The banks have been accused for ‘lowballing’ in the London court after a similar lawsuit was dismissed in the federal court of New York due to lack of jurisdiction last year.
Notably, lowballing means submission of artificially low estimates to the Libor rate-setting process, which misrepresents increased creditworthiness of these companies. FDIC accused banks for lowballing between 2007 and 2009, which showed them more creditworthy than they actually were.
The list of accused banks includes — Deutsche Bank AG DB, Barclays PLC BCS, Lloyds Banking Group plc LYG, The Royal Bank of Scotland Group plc RBS, Rabobank and UBS Group AG UBS. These banks have been charged with allegations on behalf of 39 failed U.S. banks which suffered due to such malpractices. Per the allegations, these U.S. banks considered manipulated LIBOR while carrying out derivative transactions and calculating interest for which they suffered huge losses.
Among above-mentioned banks, UBS Group AG and Lloyds carry a Zacks Rank #2 (Buy), while RBS and Deutsche Bank carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, the amount of losses is yet to be disclosed as the scale of lowballing has not been determined by the FDIC. Though the lawsuit in London has not quoted any value, the FDIC’s New York lawsuit has sought damages around $1 billion.
LIBOR is a widely accepted benchmark rate. Several financial institutions, mortgage lenders and credit card agencies lay down their own rates in relation to this. Derivatives and other financial products are connected to this rate.
Therefore, manipulation of benchmark interest rates by major financial institutions has 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.
Lloyds said in a statement, “We do not believe the claim has any merit and is being contested vigorously.”
Further, the other banks, the BBA and the FDIC refrained from comments.
Regulatory authorities are investigating the matter and plan to put forward a landmark judgment, in a bid to curb the occurrence of 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.
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