The LIBOR scandal will be a field day for our learned friends. An estimated $350 trillion worth of financial instruments is tied to the benchmark interest rates. The potential cost of litigation against the banks from those who own and trade those swaps and other securities that were priced using LIBOR could be substantial, as will be the legal fees involved. Contingent provisioning against that has yet to be fully priced into bank stocks.
Barclays’ settlement with U.K. and U.S. regulators over LIBOR rigging is just the start. Several other international banks are still being investigated by authorities. Heftier fines than even the £290 million ($450 million) one imposed on Barclays are quite possible, as will be taking away LIBOR-setting from the hands of the bankers themselves. No longer will it be the responsibility of their industry group, the British Banking Association. That latter step will be part of an urgent rebuffing of London’s reputation as a transparent internal financial centre that will need to be undertaken by the U.K. authorities.
One other consequence of the LIBOR scandal will be to make U.S. lawmakers even less inclined to embrace international financial regulation. It will be argued that benchmark interest rates that affect American consumers and investors should be regulated at home, even if many in the U.S. Congress had been blissfully unaware of LIBOR until very recently.