Banks 'Face £27bn Libor Hit'

The banks under investigation in the Libor rate-fixing scandal face combined losses of up to $42bn (£27bn), far more than previous estimates, according to one of the City's leading equity research houses. I have obtained a confidential note sent to clients by Autonomous Research today which suggests that 16 banks face a financial hit that would potentially alter the economics of investing in the global banking sector. In its note, Autonomous (which is chaired by the former City minister, Lord Myners) warns that if Libor was under-reported (in other words, that banks' submissions were too low) by 2.2 basis points, it could trigger fines and litigation costs of as much as £27bn. "We estimate $37bn of potential damages for rates derivatives (across all currencies)... We estimate adding bank loan and money market fund lawsuits could add a further 14%, or $5bn to the overall damages, bringing the possible total to $42bn," its note said. To be clear, the figures are at this stage pure conjecture, and Autonomous points out that they "must be used with great care and read in conjunction with a very long list of caveats". Nonetheless, the fact that such a respected research team as that of Autonomous is depicting such a cataclysmic financial scenario points to the grave crisis facing the international banking sector. It does not make pretty reading for investors in UK banks, with the analysts pointing to a prospective cost of £6.9bn for Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland. Last week, Morgan Stanley attracted headlines with a note forecasting losses for 12 banks running to $22bn (£14.1bn) Libor is the benchmark for hundreds of trillions of pounds-worth of derivatives, loans and mortgages, and is now the subject of formal inquiries by the Government, the European Commission and regulators in several countries. Barclays is so far the only bank to have settled with authorities over Libor-fixing. It was fined £290m by regulators in the UK and US, a relatively modest sum in the context of what analysts now believe may be the final bill facing it and other banks. The estimates are so vast because of the tsunami of shareholder litigation that is expected to flow from the scandal as well as the prospect of tighter regulation that could restrict banks' profits. Barclays, of course, will not be immune to this, so it's conceivable that its own financial hit will ultimately be much larger than the £290m in fines. The Automonous analysts pick Barclays, Citi, Royal Bank of Scotland and UBS as having the largest exposure to legal costs although they add that "we believe it is both premature and inappropriate to focus on individual banks at this early stage in the process. As more evidence comes to light, perceptions of alleged manipulation and/or collusion could change dramatically". Barclays' executive committee hinted at the scale of the impact on the wider industry in a memo to staff on Friday. Referring to the litigation risk facing the banks under investigation, which also include Deutsche Bank, Autonomous says that "given the regulatory and political furore over the Libor allegations, we find it hard to believe this case will be easily dismissed by the defendant banks". On Monday, Jerry del Missier, the former Barclays executive who passed an instruction to the bank's Libor-setters to falsify its submissions, will give evidence on the scandal to the Treasury Select Committee.