Banks’ Libor costs may hit $22bn

Twelve global banks that have been publicly linked to the Libor rate-rigging scandal face as much as $22bn in combined regulatory penalties and damages to investors and counterparties, according to Morgan Stanley estimates.

The analysis, which the authors admit is “crude”, assumes that 11 more banks will be penalised like Barclays, which paid $456m last month to US and UK authorities for attempting to manipulate the London Interbank Offered Rate, the benchmark for $360tn in derivatives, loans and mortgages.

The calculation excludes the potential fallout from ongoing US and European Union cartel investigations, which could result in multibillion-dollar fines.

Joaquín Almunia, the EU’s competition enforcer, will on Friday say the year-old EU cartel probes into interest rate derivatives linked to Libor and two similar rates known as Euribor and Tibor are one of his “top priorities”.

Mr Almunia will say that the “shocking” Libor scandal represents some of the banking sector’s “most irresponsible behaviour of the past”. Should his concerns be confirmed, he wants the punishment to prompt “a change in culture” in a banking sector hitherto largely untouched by cartel enforcement.

European Commission cartel investigations take several years to complete, but can result in fines of up to 10 per cent of turnover. Under EU law, investigators simply need to demonstrate there was an attempt to form a cartel, rather than prove its exact effect on the product market.

Morgan Stanley’s analysis is the most detailed effort so far to quantify the potential damage from the scandal, in which Barclays admitted to lying on its submissions to the Libor rate-setting process.

The estimated fines would cut 4-13 per cent off banks’ earnings per share for 2012, or 0.5 per cent off book value, Morgan Stanley said.

The analysis also puts a value on the potential risk from class action lawsuits. Each of the banks named would pay an average $400m, with individual charges ranging from $60m to $1.1bn, depending on the size of their derivatives books.

The analysis assumes most of the other 11 banks will admit to roughly similar behaviour and will not receive the same discount as Barclays for early co-operation.

Some banks say privately that they do not have to cope with emails as stark as those sent by the Barclays’ traders promising bottles of Bollinger in return for specific rate quotes.

But Peter Wright, a former enforcement lawyer, said: “Barclays was not accused of conducting its business with a lack of integrity. If this is an allegation that is being pursued against other institutions . . . the financial penalty would be substantially higher.”