RBS Facing Investigation over Libor Scandal

on Aug 24, 2012

John Mann, labour MP on the Treasury committee, said Royal Bank of Scotland’s involvement in the Libor manipulation scandal could be even more extensive than Barclays’. If these allegations turn out to be true, the state-owned bank might face a larger fine than the £290m, which Barclays paid earlier this year.

Libor manipulation has been suspected by regulators since the end of 2008, but only last year did investigations in the UK begin in earnest. Andrew Lo, professor of finance in MIT, said “This dwarfs by orders of magnitude any financial scam in the history of markets.” The London interbank offer rate is an interest-rate benchmark for many other rates ranging from mortgages to commercial loans. Estimates of the value of assets related to the Libor range between $500 to $800 trillion. The rate is calculated daily and by Thomson Reuters. London banks tell the agency the interest rate they expect to pay on loans from other banks and then Thomson Reuters drops the outliers and averages the rest of the rates. Essentially the system is honour-based.

!m[](/uploads/story/296/thumbs/pic1_inline.png)-Banks are being accused of purposefully inflated or deflated the rates reported, depending on what would serve them better at the given moment. A bank would for example deflate the rate it reports as to appear more creditworthy than it actually is. Although this seems very distant to the average person, it in fact influences almost everyone who has ever taken out a credit. If the Libor was artificially inflated when you took out a loan, you were given a higher interest rate than what you would have otherwise paid. The city of Baltimore has filed lawsuits against major banks including Bank of America, Citibank, JPMorgan, Barclays and Deutsche Bank for it having had to pay higher rates as a result of this type of manipulation. The scandal is so serious there are ongoing discussions on whether the Libor should be scrapped completely as its integrity has been compromised.

The extent to which RBS could be hurt became evident after a former dealer filed documents as part of a lawsuit against the bank. Tan Chi Min, who was sacked last year from his Singapore-based role as head of delta trading for the bank’s Global Banking & Markets division, said that the bank’s internal procedures were so lax anyone could have messed with the Libor. He also accused the managers of being fully aware of the misconduct involved in Libor reporting without trying to prevent them. RBS has denied these allegations of complicity by the bank’s upper management. However, a spokeswoman from the Singapore office confirmed the dismissal of employees in relation to an internal investigation. “We confirm, per our disclosures during our interim results on 3rd August, that we have dismissed a number of employees for misconduct as a result of our investigations into the setting of LIBOR and other interest rates,”

MP John Mann has asked George Osborn, Chancellor of the Exchequer and Second Lord of the Treasury of the United Kingdom, whether the Treasury is aware that the Financial Services Authority is investigating RBS in relation to the Libor scandal. City minister Mark Hoban also said he was kept in the dark and only recently became aware of the seriousness of the situation.

“If Osborne denies receiving any information there needs to be a full Cabinet Secretary investigation into the running of the UK taxpayers investment in RBS; the failure to protect future share values and the liability of both Osborne and UKFI [UK Financial Investments Ltd] if losses accrue to the taxpayer due to a lack of due diligence.” said Mann.
Last week the Treasury select committee criticised the FSA for being too slow on its investigations, strolling two years behind US regulatory institutions. As of next year, Bank of England is expected to assume the leading role in banking regulation in the UK.


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