Libor scandal hits where it hurts as billions wiped off bank shares

Bob Diamond has been in the eye of the storm over Liborscandal
Bob Diamond has been in the eye of the storm over Liborscandal
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BANKING shares were hammered yesterday as politicians weighed into the Libor-fixing scandal, raising the spectre of further regulation on the sector and threatening harsher punishments for the wrongdoers.

Barclays, which was fined £290 million by US and UK regulators after being caught trying to rig the interest rate at which banks lend to each other, saw nearly £4 billion wiped off its market value as its shares plunged by 15.5 per cent.

Royal Bank of Scotland was not far behind, shedding 11.5 per cent of its worth as Chancellor George Osborne confirmed it was among other banks being investigated.

Speculation mounted that any banks involved could face civil lawsuits claiming billions of pounds in compensation from institutions that lent money using the Libor rate as a basis.

HSBC, Lloyds, UBS and Citigroup are among others suspected of being involved in fixing the London and European inter-bank lending rate in the years running up to the financial crisis.

Investors held their nerve when news of Barclays’ fines emerged on Wednesday, but their resolve crumbled yesterday as the Serious Fraud Office was called in to investigate further and ministers ratcheted up their rhetoric.

Michael Hewson, senior analyst at CMC Markets, said: “The likelihood is that other banks could well become embroiled in the controversy given that Barclays would have been unlikely to pull off anything like this on their own.

“This has hit share prices hard as investors fear further regulatory burdens.”

The scandal is another blow to the beleaguered banking sector as it battles to restore its tarnished image in the wake of the financial crisis, the scandal of mis-sold payment protection insurance (PPI) and the computer problems at RBS which froze millions out of their accounts last week.

Barclays is the first major financial institution to settle with regulators following a wide-ranging investigation that has spanned North America and Europe, and there is speculation that any banks who have not worked with the authorities could be hit with even larger fines. The fine from the FSA would have been £85m if Barclays had not co-operated.

Barclays also agreed to settle a penalty of $200m (£128.2m) with the Commodity Futures Trading Commission and $160m to the US department of justice.

Jonathan Jackson, head of equities at Killik & Co, said even that may not buy Barclays immunity from further action.

“It is difficult, in the absence of further information, to gauge the impact of potential civil lawsuits and the protection, if any, that Barclays would enjoy under the agreements announced with the regulators,” he said.

“Some estimates are that potential damages could run into the several billions of dollars, certainly damaging to Barclays but not too significant in the context of core tier one capital of £43bn and annual net income over £3bn.”

But Jackson still recommended buying Barclays shares, saying that the damage was priced in. Shares in Lloyds were also lower despite positive broker comments on its tentative agreement to sell 632 branches to the Co-op, announced on Wednesday after markets closed.