Litigation Costs Remain Uncertain, Says Moody's on Libor Allegations

Any future regulatory fines against banks from their alleged manipulation of the London Inter Bank Offered Rate (LIBOR) would likely be absorbable within each bank's annual earnings and would therefore not be significant enough to prompt rating actions, says Moody's Investors Service.


However, losses from potential litigation over the alleged manipulation, though highly uncertain and difficult to quantify, could turn out to be much larger than any regulatory fines, and would therefore be more likely to have credit-negative rating implications.


In a new report, Moody's describes the LIBOR rate-setting process, details the alleged misconduct, and highlights credit and litigation risks facing the LIBOR panel banks.


In addition, Moody's assesses potential near-term developments -- such as additional settlements or lawsuits, class action suits and judicial decisions -- that the rating agency believes could increase the risk of losses or franchise damage.


Moody's considers that the potential risks to firms fall into the following categories (1) regulatory fines/penalties; (2) litigation settlements; and (3) other (reputational damage, management upheaval, strategic changes). Moody's does not believe that the imposition of regulatory fines is likely to prompt rating actions. However, Moody's says that negative pressure on LIBOR panel banks' ratings could develop following (1) associated management upheaval and/or strategic changes; and/or (2) revelations of previously unidentified risk-management or control failures.


With litigation efforts in their very early stages, Moody's says that the magnitude of any monetary damages or settlements is difficult to quantify, but they could ultimately have credit-negative implications.


Moody's notes that the largest LIBOR panel banks have more earnings and capital with which to absorb potential losses. However, those banks are not necessarily less vulnerable than the smaller banks, especially if higher absolute transaction levels associated with the larger banks lead to larger litigation losses.


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