First There Was the Libor Scandal...

(December 10, 2012) — European Regulators could be about to turn on banks, accusing them of manipulating the Euro Interbank Offered Rate (Euribor) following the scandal that hit the financial world over Libor-fixing earlier this year.

The European Union is set to accuse several banks of attempted collusion in the setting of Euribor, The Wall Street Journal reported this morning citing sources close to a probe into the issue. Libor is the benchmark rate used all over the world to set lending rates between financial institutions, their investors, and clients. There are several local equivalents around the world.

The first bank to publically state it had rigged the Libor rate, Barclays, has already admitted it tried to fix the European rate and regulators on both sides of the Atlantic have been investigating the matter.

Barclays was made to pay a record fine and several of its top brass exited the business as a result. Other banks have been investigated and many expect more fines to follow.

Numerous investors in these banks, including large US and European pension funds, began examining potential legal action against the firms. More widely, investors that did not hold the affected bank’s stock have looked into how manipulation of the rate to see whether they are entitled to launch legal action.

In July, the chief investment officer of the largest pension plan in the US signalled that his fund could pursue litigation against banks over the alleged manipulation of Libor. Joe Dear, the CIO of the $233 billion California Public Employees’ Retirement System (CalPERS), made the admission at a fund board meeting.

“If we were harmed by specific actions by specific banks, we will seek remedial correction,” Dear said at the meeting, according to Bloomberg. “My hope is that the authorities will review the situation and prosecute where possible those who have done the system harm. It is difficult to underestimate the magnitude of the Libor rate fixing as an episode that fundamentally undermines investors’ confidence in our capital markets.”

However, Jim Grant, publisher of Grant’s Interest Rate Observer, told aiCIO that investors should not be concerned with Libor fixing by banks as interest rates had already been manipulated by financial regulators attempting to solve and stem the damage of the financial crisis. To watch the interview with Grant, click here.