European Commission Finalizes Rate-Rigging Fines For Crédit Agricole, HSBC and JPMorgan

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The European Commission (EC) closed its investigation into the role of global banking giants in manipulating benchmark interest rates earlier this week by announcing fines of €485 million ($520 million) for Crédit Agricole, HSBC (NYSE:HSBC) and JPMorgan (NYSE:JPM) – the three banks that held out from settlement talks with the apex regulatory body for the European Union in late 2013. [1] The EC began its investigation of nine global banking giants and two brokerage firms in March 2013 over their alleged manipulation of the LIBOR, EURIBOR and TIBOR, and handed out fines totaling €1.71 billion to most of them later that year. These fines were based on the extent of their involvement in the wrongdoing, and also the amount of cooperation each of them extended to the EC during the investigation. [2] Taken together with the recently announced figures, the EU has imposed total fines of €2.21 billion ($2.38 billion) on the financial institutions involved.

Among the three banks fined recently, JPMorgan faces the heaviest penalty of €337 million ($365 million) followed by a fine of €115 million ($124 million) for Crédit Agricole. HSBC received a nominal fine of €34 million ($37 million). Notably, Crédit Agricole has already set aside enough provisions to cover this fine, while the figure for HSBC is not material for the diversified banking giant. JPMorgan will incur a one-time cost in its Q4 results due to the fine, but we do not expect the final impact on the bottom line to be material given the bank’s average quarterly pre-tax profit figure of $8 billion. Although these three banks are expected to appeal their fines in European courts, accounting rules require them to expense the cost in this quarter. [3]

See the full Trefis analysis for JPMorganCitigroupDeutsche Bank | UBSBarclaysHSBC

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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 like credit cards and mortgages to institutional products like derivative contracts. Since these rates are determined by the world’s largest banks, who also have established securities trading operations, there is an inherent incentive for them to move the benchmark rates in a direction more profitable to them. Since late 2012, 16 global banks and several other financial firms have been investigated for manipulating foreign exchange rates (see FDIC Sues 16 Global Banks For Roles In Manipulating LIBOR), with many of them still being investigated by several regional financial regulators.

As a part of its investigation into the rate-rigging scandal, the European Commission divided the banks into two cartels based on their involvement in determining the benchmark rates for the euro and Japanese yen. The fine applicable to each bank was determined by first identifying the extent of their involvement in manipulating the benchmark rates, and then waiving some (and in two cases all) of the fine amount to arrive at the final amount. The table below summarizes the fines imposed by the EC on individual firms over the years and also highlights which of the two cartels in which each was included:

EC_EURIBOR_Fines

In the table above, a ‘-‘ for a particular firm indicates that the EC did not fine the firm. All but four of these fines were announced by the EC in December 2013. ICAP’s €15 million fine figure was announced by the EC in February 2015. [4] The latest fines for JPMorgan, Crédit Agricole and HSBC stem from their involvement in the euro cartel – a charge the banks continue to deny.

Notably, UBS and Barclays escaped without fines because of their cooperation in the investigation despite being assessed with the highest fine amount in each cartel. If their fines had not been waived, UBS would have paid €2.5 billion, and Barclays would have had to shell out €690 million in late 2013. For a notable involvement in both the cartels, Deutsche Bank had to pay the largest fine of €725 million. Also, the quantum magnitude of the fine is higher for manipulating euro rates compared to yen rates due to the more widespread use of euro benchmark rates globally.

As we mentioned above, the fine on JPMorgan will have a small negative impact on operating margins for the bank’s investment banking division for Q4 and full-year 2016. You can see how changes to JPMorgan’s investment banking margins impact our price estimate for the bank by modifying the chart below.

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Notes:
  1. Commission fines Crédit Agricole, HSBC and JPMorgan Chase € 485 million for euro interest rate derivatives cartel, EC Press Release, Dec 7 2016 []
  2. Antitrust: Commission fines banks € 1.71 billion for participating in cartels in the interest rate derivatives industry, EC Press Releases, Dec 4 2013 []
  3. JPMorgan Hit Hardest as EU Fines Euribor Trio $521 Million, Bloomberg, Dec 7 2016 []
  4. Antitrust: Commission fines broker ICAP € 14.9 million for participation in several cartels in Yen interest rate derivatives sector, EC Press Release, Feb 4 2015 []