Deutsche Bank Gained Big Time From Libor Bets In 2008

January 11th, 2013 by Trefis Team
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When Barclays (NYSE:BCS) was fined an unprecedented $451 million by U.S. and U.K. regulators last June for its alleged involvement in manipulating benchmark LIBOR rates during the global economic crisis of 2008, everyone thought this was as big a fine that ever could be levied on a bank (see Barclays Paying $451 Million in LIBOR-Fixing Case, Who’s Next?). But the regulators soon broke new ground by slapping UBS (NYSE:UBS) with a $1.5 billion fine for its involvement in the LIBOR scandal (see UBS Settles Libor Manipulation Charges At A Whopping $1.5 Billion).

The sheer size of the fines imposed on the two banks speaks volumes about the importance of LIBOR. After all, this benchmark directly influences interest rates for all types of loans around the world and also forms the basis of almost the entire multi-trillion dollar derivatives market. And if you are wondering how much a bank stood to gain by tweaking LIBOR rates back in 2008, it should suffice to say that Deutsche Bank (NYSE:DB) generated a profit of at least €500 million ($654 million) that year from interest rate-related trades according to the Wall Street Journal. [1]

We are in the process of updating our $46 price estimate for Deutsche Bank’s stock in view of the recently announced relaxation in Basel III norms.

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So Was The Manipulation Worth It?

Going by what Deutsche Bank has to say, the banks had a strong rationale for manipulating LIBOR rates. According to the largest German bank, it had so many investments linked to the benchmark interest rates at the end of Q3 2008 that an increase or decrease in LIBOR by a single basis point (i.e. by 0.01%) meant a gain or loss of about €68 million ($89 million). It would hence not be a very far-fetched idea to assume that trading revenues for all the major investment banks at that time were similarly sensitive to changes in the LIBOR. And if you factor in the considerable swing in the Eurodollar LIBOR rates during the economic recession (1-month Eurodollar LIBOR fell from nearly 4% in October 2008 to under 0.25% in October 2009), the banks’ inclination towards manipulating the rates to allow them better access to funds or to simply make more money off existing trades becomes rather obvious. [2]

Such a manipulation would directly impact a bank’s FICC trading yield figures. You can make changes to the chart above to see how a change in Deutsche Bank’s trading yield affects its share value.

What Does This Mean For Deutsche Bank?

Deutsche Bank is among a dozen other banks that are under scrutiny by regulators over their role in the LIBOR scandal. And while the information revealed by the bank is not indicative of any foul-play on its part, the bank is expected to end up footing a multi-million dollar bill in the lines of Barclays to settle this issue. This would hit its investment banking margins over the period the settlement is reached and represents a minor downside to its stock value.

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Notes:
  1. Bank Made Huge Bet, and Profit, on Libor, The Wall Street Journal, Jan 9 2012 [↩]
  2. LIBOR Rates, FedPrimeRate.com [↩]