Litigation costs associated with the LIBOR scandal are uncertain, but they represent a greater risk to banks’ credit ratings than regulatory sanctions, says Moody’s Investors Service.
In a new report, the rating agency says that 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”.
However, it warns that losses from potential litigation over the alleged manipulation, which are both 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.”
Additionally, it suggests that banks could also face reputational damage, management upheaval, or strategic changes, too.
For now, litigation efforts remain in the very early stages, Moody’s says. And, as a result, the magnitude of any monetary damages or settlements is difficult to quantify; but they could ultimately have credit-negative implications, it notes.
While the largest LIBOR banks have more earnings and capital to absorb potential losses, they are not necessarily less vulnerable than the smaller banks, Moody’s notes, “especially if higher absolute transaction levels associated with the larger banks lead to larger litigation losses.”
“Given the fluid nature of the current investigations and pending litigation, Moody’s intends to monitor the ongoing developments and will use the framework described in this report as a basis to consider the potential credit implications,” it concludes. “Well before any final court decision or legal settlements are reached, Moody’s would expect numerous related legal and regulatory developments over an extended timeframe. This will bring greater clarity to the likely impact of regulatory fines, potential litigation losses and penalties on LIBOR panel banks’ credit profiles.”