In the United States, 16 big banks have been sued by The Federal Deposit Insurance Corp. FDIC is a bank regulator in the U.S. The banks are being sued for tampering with a yardstick which is used to calculate interest rates on contract.
Of the 16 banks, some are foreign. The list of accused banks includes Bank of America Corp. Citigroup Inc, JPMorgan Chase & Co, etc. These are some of the world’s largest banks.
The FDIC briefed that being a regulatory agency, they are trying to recover the losses due to interest rate manipulation carried out by these banks. On Friday, the civil lawsuit against the banks was filed by the agency. Interestingly, 10 out of the 16 banks failed during the economic meltdown. The agency then took over those banks.
The chief allegation of FDIC is that the banks that are accused, set Libor rates in such a way that the rates would meddle with a competitive process in the market. This way, the prices got increased artificially and it increased the earning margin of the banks.
The Libor rate is an acronym of London Interbank Offered Rate. The complaint filed by FDIC states that the Libor rate was rigged from August 2007 to mid of 2011. The manipulation of rates, according to FDIC derailed contracts around the world and caused loss of trillions of dollars. Bonds, consumer credit, car loans, student loans, financial derivatives and mortgages were mostly affected.
Investigation of Libor rate manipulation has been taking place across Asia, Europe and the US for last two years. Some very big names in the banking industry were accused and fined by British and US regulatory authorities. Rabobank, ICAP, Royal Bank of Scotland, Barclays, UBS and some other large banks would have to pay a fine amount of $3.6 billion.
To find a safeguard, the banks have already signed an agreement with US Department of Justice that would save them from criminal prosecution even if they are convicted. It was necessary for them as the FDIC suit reads, “fraudulently and collusively suppressed (the LIBOR rate), and they did so to their advantage,”
In July 2013, NYSE Euronext will start to supervise LIBOR from British Banker’s Association. NYSE Euronext currently owns New York Stock Exchange.