WASHINGTON (7/16/12)--The global investigation into manipulation of the London interbank offered rate (LIBOR) and other interest rates will further sully the reputation of big banks, but the interest rate issues are unlikely to have a significant impact on credit unions, Credit Union National Association (CUNA) Chief Economist Bill Hampel said.
LIBOR is used by financial institutions to set interest rates on a variety of financial products, including mortgages, student loans and credit cards. LIBOR for the U.S. dollar is based on information provided by 18 global financial institutions, including several U.S. banks.
British bank Barclays PLC recently admitted that some of its employees conspired with employees of other financial firms to manipulate LIBOR and the Euro Interbank Offered Rate to support their own financial positions. The manipulations took place between 2005 and 2009.
Regulators have fined Barclays, and governments and individuals may also take legal actions against Barclays and other firms. Some Barclays executives resigned following the LIBOR revelations.
"The LIBOR manipulations apparently took place several years ago, and are unlikely to be occurring now. The interest rate distortions that did exist were likely to have been measured in basis points rather than percentage points," Hampel said. "Credit unions that peg one or more products to LIBOR should be prepared to answer member questions arising from the publicity. And, of course, there is likely to be a flurry of legal actions stemming from the scandal, and credit unions could get caught up in the crossfire," he added.
Barclays agreed to pay $160 million in fines, and to implement compliance and internal control measures, under a settlement it reached with the U.S. Department of Justice (DOJ) late last month. The U.S. Commodity Futures Trading Commission has also imposed a $200 million fine on Barclays, and the U.K.'s Financial Services Authority (FSA) has fined it around $92 million.
British authorities also are looking into the relationship between Barclays and the FSA, and governments and authorities in several countries are investigating big banks such as JP Morgan and Citigroup for their roles in potential interest-rate-manipulation schemes.
The Senate Banking Committee is also planning to investigate interest-rate-manipulation allegations, and is holding briefings to inform committee members on how the manipulations may have impacted American consumers and the U.S. financial system. The committee will hold hearings in July with Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, committee Chairman Tim Johnson (D-S.D.) said.
A group of 12 senators last week asked U.S. Attorney General Eric Holder, Geithner, Bernanke, the National Credit Union Administration and other U.S. financial regulators on the Financial Stability Oversight Council to undertake "a thorough, independent investigation into the LIBOR manipulation scandal." Banks and employees that have broken the law "should face appropriate criminal prosecution and civil action," the letter added. The senators in that letter also asked the DOJ to examine "allegations that U.S. and foreign bank regulators may have been aware of this wrongdoing for years," and to hold any regulators that knew of the abuses accountable for their failure "to stop wrongdoing that they knew, or should have known about."
A Barclays employee in early 2008 told Federal Reserve Bank of New York representatives that "underreporting of LIBOR was prevalent in the market," according to documents released by the New York Fed Friday.
The New York Fed said it "helped to identify problems related to LIBOR and press the relevant authorities in the U.K. to reform this London-based rate." Geithner, who was the head of the New York Fed at that time, discussed LIBOR issues in an e-mail to Bank of England Governor Mervyn King. Geithner suggested that United Kingdom regulators improve the integrity and transparency of the rate-setting process, and make LIBOR submissions subject to internal and external audits.