Research Firm Pegs Total Rate-Rigging Fines For Banks At $35 Billion

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A report by independent research firm Autonomous Research released earlier this week estimated that global banking giants will incur total settlement charges of roughly $35 billion for their involvement in manipulating benchmark foreign exchange rates. [1] Autonomous based its estimates on the actual fines imposed by regulators on banks over the last two years for rigging LIBOR rates. The conclusion is drawn to a large extent from the fines handed down by the European Commission (EC) to these banks (see EC Hands Down $2.3 Billion In Fines To 8 Banks For Rigging Benchmark Rates) – without taking into consideration any waivers or discounts the EC extended to them. Using the rationale that “repeated wrongdoing attracts higher penalties” along with these penalty figures, the research firm came up with estimates of total liabilities for each of the world’s largest banks due to the rate-rigging scandal.

Autonomous concludes that the Swiss banking giant UBS (NYSE:UBS) could be staring at $8 billion in total fines, followed by a figure of $4.4 billion for the largest German bank, Deutsche Bank (NYSE:DB) and $4.3 billion for Citigroup (NYSE:C). Notably, the $35 billion in total fines estimated is a far cry from the $6 billion in LIBOR-related fines these banks have incurred over the last two years. If the estimates are indeed accurate, then we will be seeing substantial hits to income figures for the banks over subsequent quarters – specifically because none of the banks has set aside legal provisions anywhere near what Autonomous predicts.

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Benchmark rates such as LIBOR, EURIBOR and TIBOR are used around the globe by financial institutions to determine interest rates for everything ranging from retail products such as credit cards and mortgages to institutional products such as derivative contracts. That is why the discovery in mid-2012 that Barclays had manipulated these rates over a period of several years kicked off a series of investigations by financial regulators worldwide. Since the benchmark rates are determined by the world’s largest banks who also have established securities trading operations, there is an inherent incentive for them to collude and move the benchmark rates in a direction more profitable to them.

There are no less than 16 global banks that are currently being investigated for manipulating foreign exchange rates (see FDIC Sues 16 Global Banks For Roles In Manipulating LIBOR). Each of them also faces a long list of lawsuits from institutional as well as private investors. So Autonomous Research’s estimate of the total legal liability for the banks could very well be close to the mark. The research firm, which covers all major European banks and insurers, as well as U.S. banks, asset managers and payment processors, took into account the EC’s fines as well as the $451 million settlement by Barclays (NYSE:BCS) in June 2012, the $1.5 billion settlement by UBS (NYSE:UBS) in December 2012, the $621 million settlement by The Royal Bank of Scotland Group (NYSE:RBS) in February 2013 and the $1 billion settlement by Rabobank last October. ((Rabobank agrees $1bn rates manipulation settlement, Financial Times, Oct 29 2013).

All the banks concerned will take charges to their quarterly performance for the period in which they settle their respective cases, which for many of them could be a multi-billion dollar figure. Taking the example of UBS, which Autonomous predicts will face the largest legal liability of a whopping $8 billion, this figure is just under 10% of our estimated market cap for the bank. You can understand the impact of settlement charges on UBS’s share price by making changes to the chart below which represents operating margins for its investment banking division. What remains to be seen is how close these estimated figures turn out to be to the actual settlement amounts over coming months.

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  1. UBS falls on $8 billion estimate in FX fine research report, Reuters, Jun 12 2014 []