US FDIC files High Court LIBOR suit against several High Street lenders

A federal US government agency has brought a case against several of the world's largest banks, including the biggest UK lenders, alleging that their manipulation of the London Interbank Offered Rate resulted in losses for US lenders.

In a suit filed with the High Court, the US Federal Deposit Insurance Corporation alleges that between August 2007 and at least until the end of 2009 multiple banks including Barclays, Lloyds and Royal Bank of Scotland colluded to "materially suppress" the dollar LIBOR rate, according to The Times.

"Each bank defendant had a common financial and profit-based incentive to collude to lowball [US dollar] Libor submissions and in turn to cause USD Libor to be lower than it otherwise would have been. A lower USD Libor (and prior knowledge of the suppression of the rate) enabled the bank defendants (and any other bank parties to the agreement or concerted behaviour) to adjust their trading positions and profit from downward movements in interest rates and/or from decreased borrowing costs," the suit stated.

Published back then each day by the British Bankers' Association, on the basis of a competitive bidding process among a panel of banks, LIBOR interest rates were a key bit of the global financial architecture, with financial assets and contracts with a notional value of approximately $350trn influenced by fluctuations in that rate.

They were also a key reference when determining the cost of lending between financial institutions and a critical gauge for analysts trying to track the degree of financial stress in the system.

Nonetheless, during the worst moments of the past crisis a spike in LIBOR interest rates was also one of the worst nightmares of many traders, as governments around the world struggled to come to grips with the sheer true scale of the financial meltdown they had permitted (and contributed to), due to the risk that a 'snowball' effect would ensue.

The FDIC brought the claim on behalf of the 39 American banks that it rescued during the crisis, alleging they lost out as a result of the manipulation, because they too had a wide variety of assets tied to US dollar LIBOR on their books.

According to the US agency, those banks had a combined market capitalisation north of $440bn before they went under.

Deutsche Bank and UBS were among the foreign lenders included in the suit.