London/Washington: Regulators are probing whether a handful of major banks manipulated a global benchmark interest rate to tart up their credit quality, a person familiar with the matter said on Thursday.
Bank of America, Barclays, Citigroup, WestLB and UBS are the focus of the investigation by regulators in Britain, Japan and the United States, said the source, who asked not to be named.
Swiss bank UBS had said on Tuesday it received subpoenas from Japanese and US regulators regarding whether it made “improper attempts” to manipulate the London interbank offered rate, known as Libor.
Investigators are probing whether banks understated Libor to reduce their borrowing costs and downplay investor panic during the financial crisis. Among the data examined are discrepancies between offered rates and some banks’ credit risks, as measured by credit-default swaps.
About $350 trillion worth of financial products globally reference Libor, and lower levels for the rate could have robbed lenders and investors of significant amounts of interest income. Borrowers, on the other hand, would have benefited.
The five large banks under investigation contribute to a daily survey conducted by the British Bankers’ Association on what they charge each other to borrow dollars and other currencies. At the end of each business day, these London interbank offered rates are calculated by the BBA.
Some analysts questioned the need for the probe, coming a year after the BBA conducted its own probe on its dollar Libor panel when there was intense criticism over the reliability of the benchmark during the 2007-2009 global crisis.
The group concluded at the time no member bank manipulated rates. “I am not sure what their goal is here,” said Mary Beth Fisher, an interest rate strategist at BNP Paribas in New York.
Thursday’s Financial Times, citing people familiar with the investigation, reported Barclays, BofA, and Citi had all received subpoenas from US regulators.
Investigators had also demanded information from WestLB, although the German bank said it had not been subpoenaed, the paper said.
Regulators contacted by Reuters, as well as Barclays, BofA, Citi and WestLB, all declined to comment.
Needle in a haystack
Some lawyers said the regulators, who are investigating the setting of dollar Libor prices in 2007 and 2008 - just before and during the financial crisis - faced a tough task.
“Unless significant in terms of evidence, to prove such in such turbulent markets would be less than clear cut - and like searching for the needle in a haystack,” said Tom O’Riordan, a partner at law firm Paul Hastings.
Libor rates spiked during the financial crisis but were widely criticized at the time for not having risen enough to reflect market pricing. The system relies on banks providing honest prices and the price provided by each bank being transparent.
Thomson Reuters compiles and publishes the data on behalf of the BBA. Reuters News is part of Thomson Reuters.
The BBA declined to comment on the investigation.
Data reviewed by US regulators showed suspicious divergence between Libor rates when compared to derivatives known as “credit-default swaps,” which reflect the likelihood of a bank defaulting on its debt, a person familiar with the matter said.
Generally, there should be a strong correlation between Libor levels and credit-default swap prices, but the data reviewed by regulators showed that Libor was lower than credit-default swap levels implied, the source said, speaking anonymously because the review was not publicized.
That lower level may have been because banks were artificially pushing down Libor, to reduce their borrowing rates and make their credit quality look better than the market actually perceived it to be.
But it may also have been due to other factors, such as low market activity forcing banks to make their best guess for the level at which they would borrow overnight.
The source familiar with the US regulatory scrutiny said of all the banks examined, the one whose credit risk appeared most closely connected to the Libor rate was the Royal Bank of Canada.
A spokeswoman from RBC declined to immediately comment.
Sixteen banks contributed to the dollar rate in 2008. The lowest and highest four contributions are discarded and the remaining rates averaged.
In December 2008, the BBA said it would enhance governance and scrutiny of procedures on the data, and earlier this year four more banks were added to contribute to the dollar rate.