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RBS and Barclays face yet another banking scandal

  • @TheIndyBusiness

Barclays, Royal Bank of Scotland and HSBC were yesterday at the centre of yet another investigation by regulators, after European watchdogs said they were among 13 banks charged with shutting exchanges out of the lucrative credit derivatives market.

The European Commission said the banks acted to block two big exchanges, Germany's Deutsche Börse and the Chicago Mercantile Exchange, out of the credit-default swap (CDS) market. The turnover in CDSs is huge: so far this year, contracts worth £8.5 trillion have been traded.

Along with the two UK banks, the EC read out a roll call of the City's aristocracy as being part of its inquiry, including Goldman Sachs, Citigroup and JP Morgan. It also cited the data firm Markit and the International Swaps and Derivatives Association (ISDA).

All of those named could face heavy fines if the watchdog's findings are confirmed. European anti-trust regulators have the power to impose penalties of up to 10 per cent of a company's global turnover. So in the worst case, Barclays could face a fine of up to £3bn.

The inquiry covers the period 2006- 2009, when Bob Diamond was chief executive of Barclays. Fred Goodwin was running Royal Bank of Scotland for most of the period under scrutiny, until he was ousted as a consequence of the bank's multibillion-pound bailout in 2008. Michael Geoghegan and the former trade minister Stephen Green were at the controls of HSBC.

Credit-default swaps are a type of bet placed on the credit of a country or a company. They are usually arranged "over the counter" under the auspices of a City bank. They played an important role in the financial crisis as a number of institutions defaulted on loans, and the EU has been seeking to bring in tighter regulation and a more transparent process.

In a statement yesterday Joaquín Almunia, the EU's Competition Commissioner, said: "Exchange-trading of credit derivatives improves transparency and market stability. But the banks acted collectively to prevent this from happening. They delayed the emergence of exchange trading of these financial products because they feared that it would reduce their revenues. This, at least, is our preliminary conclusion. If confirmed, such behaviour would constitute a serious breach of our competition rules."

Mr Almunia gave a clear indication that if the case were proved, penalties could follow.

The banks and the two other organisations now have the opportunity to mount a defence. They have the option of requesting a hearing before commission officials and anti-trust experts ahead of the EC's final decision. Verdicts in such matters can take several years, but there was some speculation that in this case the EC may issue its final judgment before Mr Almunia leaves office towards the end of next year.

The other banks charged are Bank of America Merrill Lynch, BNP Paribas, Morgan Stanley, Credit Suisse, Deutsche Bank, Bear Stearns (now owned by JP) and UBS.

Swap shop: The 'casino' contracts

What is a credit-default swap?

It is a type of bet. One side offers insurance against a company or country going into "default" and failing to repay loans. The other receives a payout if this happens. They needn't have any connection with the company or country concerned, or their lenders.

Why are they important?

They are blamed for spreading contagion throughout the financial system during the global crisis when lots of institutions suddenly started to default on their loans.

Why is the EU unhappy?

CDSs happen behind closed doors. The EU wants them to be traded on exchanges, where a clearing house is responsible for ensuring trades go through in the event one side goes bust. It wants transparency. and some standardisation and transparency is brought to the process.