It’s safe to say that Barclays’ £290m fine is just the start of a saga that’s going to drag on for years. More banks are going to be hit with fines, and investors will try to sue wherever they can. Corporate lawyers around the world are rubbing their hands in anticipation of all the fees coming their way (we expect).
Cormac Leech at Liberum Capital has done an analysis of the UK banks’ potential Libor-fixing liabilities should there be comprehensive class-action (as separate from the regulators’ fines). Barclays and RBS would be the most impacted banks by some way. Liabilities could reach 26 per cent of their market values.
But Lloyds, HSBC and Standard Chartered would be very negligibly impacted.
Given how much we still don’t know about the scandal, his assumptions are broad and sweeping:
*Taking YE11 interest rate derivative notionals as a starting point, we assume 50% of customers were on the defrauded side of the contracts (we assume for now no clawbacks from the 50% of customers who benefited)
*Further we assume that only 20% of these derivatives are impacted, due to market growth, offsetting trades and assume that the average Libor fixing distortion is 10bps.
*On that basis over the 4 year 2007-2010 period, the net of tax cumulative impact would be GBP12bn for RBS and GBP11bn for BARC; $6bn for HSBC and GBP1bn for LLOY; total UK bank impact GBP27bn.
*We assume that an out of court settlement could be reached for 50% of these amounts. On that basis as a % of mkt cap, RBS and BARC would have a liability equal to 26% while for LLOY and HSBC is only 2%. If STAN were implicated the liability would be only 1% of market cap.
Conclusion: HSBC, LLOY and STAN have little or no direct exposure to this issue. If comprehensive class-action litigation occurs (as modeled in table) then BARC and RBS probably have further downside from current levels. BARC and RBS share prices are likely to underperform until this issue is resolved.
Barclays and RBS shares fell 14.8 per cent and 11.4 per cent respectively on Thursday.
However, there is the question of how much impact Barclays’ false submissions had on the actual rate. From the US Department of Justice:
…notwithstanding Barclays’s improperly low Dollar LIBOR submissions, those submissions were often higher than the contributions used in the calculation of the fixed rates.
The banks team at Credit Suisse writes:
… we cannot discount the risks of litigation, as we have mentioned above, the DoJ release states that for Barclays’ submissions were often higher than the contributions used in the calculation of the fixed rates’ as the rates excluded the high and low submissions. As such in some cases it maybe difficult for private litigants to argue that they were harmed by the conduct. Furthermore the DoJ has agreed not to prosecute Barclays based on certain obligations.
Nevertheless, the false submissions must have affected/distorted the rate-setting process. Presumably contributions were included in the rate calculation that might not have been had Barclays not submitted a false number.
Leech also suggests that Barclays might have made a “tactical error in being relatively forthcoming with authorities” and ending up as the first to be fined.
It’s certainly unlikely that, say, the fourth bank to be fined will get quite as much attention from the media and politicians. That’s not a small issue given the public pressure on policymakers to be seen punishing banks and bankers. (To illustrate, this is The Sun’s take on the story: ‘Britain exploded in fury over the Barclays Bank rate-fixing scandal last night, triggering a chorus of calls for mega-rich boss Bob Diamond to quit or be fired’, while the FT’s editorial took on a remarkably similar tone: ‘If he [Diamond] had an ounce of shame, he would immediately step down.’)
But being first to settle will have its advantages, namely a lower fine from regulators. Credit Suisse again:
This is an industry issue – whilst Barclays is the first bank to announce a settlement with the FSA, CFTC and DoJ it doesn’t necessarily mean that they are the most at risk from litigation. It is unclear to us why they have settled ahead of peers, and whilst it could have negative implications, it could also be a precedent in terms of cooperation with the authorities (we note the FSA statement ‘Barclays co-operated fully …. and agreed to settle at an early stage’). Reading the statements by the authorities, we expect to get settlements by others in the course of time which could be more punitive.
We leave you with a lovely quote from Bod Diamond speaking at a lecture last year where he stressed the importance of culture in establishing an ethos of trust and integrity. He said:
“Culture is difficult to define … but for me the evidence of culture is how people behave when no one is watching.”