Banks in Libor probe consider group settlement

A group of banks being investigated in an interest rate rigging scandal are looking to pursue a group settlement with regulators rather than face a Barclays-style backlash by going it alone, people familiar with the banks' thinking said.

Such discussions are preliminary, and it is unclear if regulators will enter these talks, aimed at resolving allegations that banks attempted to manipulate the London interbank offered rate, or Libor, a benchmark that underpins hundreds of trillions of dollars in contracts.

Still, there are powerful incentives for the banks to enter joint negotiations.

Barclays Plc was the first to settle with US and British regulators, paying a $453 million penalty and admitting to its role in a deal announced June 27. Its chief executive, Bob Diamond, abruptly quit the next week, bowing to public pressure and erosion of the bank's reputation.

The sources told Reuters that none of the banks involved now want to be second in line for fear that they will get similarly hostile treatment from politicians and the public. Bank discussions about a group settlement initially took place before the Barclays agreement, and picked back up in the aftermath.

It is unclear which banks are involved in the potential settlement talks. The banks being investigated include Citigroup, HSBC, Deutsche Bank and JPMorgan Chase. They all declined to comment.

A group agreement would appeal to financial watchdogs because they would be able to announce a headline-grabbing figure, showing that they were dealing firmly with the banking industry's misdemeanors, a banker told Reuters on condition of anonymity.

Earlier this year, five top US banks negotiated a USD 25 billion settlement with the US Justice Department and other federal and state agencies to resolve allegations of mortgage services abuses.

The key regulators involved in the Libor case include the US Commodity Futures Trading Commission and Britain's Financial Services Authority. The CFTC was not available for comment and the FSA declined to comment.

The main obstacle facing such a group settlement is a hesitancy on the part of the investment banks to work together in the fevered atmosphere surrounding the Libor investigations. Negotiations and haggling could drag on for some time and a resolution was far from certain, the banker said.

The fact that each bank possibly had to settle with a different group of regulators, and that the charges were different in each case also made the chances of success of such a settlement small, a source at one of the banks being probed said.

However, if they were able to reach a group settlement it would enable them to share the pain of negative publicity.

While Barclays received a 30% "discount" on the fines for cooperating fully with authorities, it sustained far more serious damage with the subsequent loss of its top management and a public pillorying at the hands of politicians.

The specter of severe penalties from regulators and the possibility of multi-billion dollar class action suits has hung over more than a dozen banks being investigated worldwide since the extent of attempts to rig Libor became clear in CFTC and FSA documents released with the Barclays settlement.

Analysts have estimated that the scandal could cost the industry between USD 20 billion to USD 40 billion, further damaging a sector that is struggling to work its way through the aftermath of the 2007-2009 financial crisis, economic downturns in Europe and the United States, and increased regulatory demands.