Today, UBS has agreed to pay $1.5 billion in fines for its role in manipulating Libor and other benchmark interest rates.
This is one of the biggest fines that regulators have levied on a financial institution, and follows last week's fine of $1.9 billion fine that HSBC paid over money laundering accusations. The UBS fines settle government claims in the United Kingdom, Switzerland and the United States. UBS is a Switzerland-based bank.
Two UBS traders were also arrested and more bank employees could be arrested as investigations continue.
In the UBS case, the government revealed a rate manipulation from 2005 to 2010 when it reported false rates to make extra profit. It acknowledged that dozens of its employees were involved in manipulating the London interbank offered rate, or Libor, as well as other related rates.
As the investigation continues, it shows these manipulations were widespread and could involve more than a dozen big banks. Barclays settled similar charges back in June, paying fines of $450 million. The bank's chairman and CEO also resigned their posts.
The punishment could go beyond billions of dollars in fines. The banks that manipulated Libor could also be hit with legal actions from plaintiffs who charge they lost money from the manipulated rates.
The name London Interbank Offered Rate (Libor) is geographically misleading. It is simply the interest rate that banks around the world charge to lend to each other. It is computed in London but used as a global benchmark for interest rates, and, according to some analysts, has affected more than $360 trillion in financial products.
Libor reflects the borrowing costs of 18 banks, including firms in Europe and Japan as well as three American institutions: Bank of America, Citigroup and JPMorgan Chase. A daily survey in London calculates Libor by averaging the rates these banks think they would have to pay to borrow from other banks. The banks, not the market or the government, set the rate. Some credit card, mortgage, student loan, auto loan, and business loan interest rates, as well as some financial products such as derivatives, are based on Libor. A rigged Libor rate means that millions of people around the world might have unknowingly paid more or less interest than they should have.
