Bank shares get bashed but aren’t necessarily mis-sold

Marc Sidwell
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BUY when there’s blood in the streets, goes the old saying. So was yesterday a good day to be buying UK bank shares? The growing outrage over the Libor scandal saw Barclays plunge 18 per cent before pulling back slightly, and RBS was also down more than 11 per cent, although HSBC and Lloyds Banking group were both down far less. So does that make Barclays and RBS better buys? That depends on how you see the new round of bank scandals playing out.

Let’s start with Libor. While the record £290m payments that Barclays will make for its attempts to manipulate the interbank lending rate are not enough to make much of a dent in its £43bn core tier one capital, it could only be the beginning. Civil lawsuits for manipulating the rate could be vast, with trillions of pounds in loans affected, and hundreds of trillions of pounds in derivatives.

And if so, it’s unlikely to just be Barclays that gets dragged down. The FSA is also investigating HSBC and RBS, among others, and Lloyds has been named in a private lawsuit in the US. The problem is that Libor is set by looking at rates submitted by a large number of banks, and outlying values are excluded. That helps to explain why investigators are looking for a wider scandal – it wouldn’t be easy for one bank to have played the system alone.

You can see where all this could be going in the lawsuit filed by US investment firm Charles Schwab against all the banks involved in setting Libor. The documents claim that these banks “collectively earned billions in net interest revenues during the relevant period”. It goes on to seek redress under US racketeering laws, claiming “every member of the enterprise participated in the process of misrepresenting their costs of borrowing to the BBA.” Of course, these claims still have to be proved, but with an awful lot of investigations still ongoing. Barclays could end up looking shrewd for having come to terms early. Now isn’t a great time to bet on any of the banks potentially involved.

Meanwhile, the new mis-selling scandal involving interest rate swaps looks set to be seriously damaging for the sector as a whole. While there’s nothing wrong in principle with complex hedging products of this kind, the suggestion that their potential downsides were glossed over is a serious one. Ironically, it has meant that for some small businesses in the UK, the costs of lower than anticipated interest rates have run into millions. Some estimates put the overall cost in the billions.

As ever though, it’s important to draw the right lessons. Guto Bebb MP, who moved the 21 June Commons debate on this scandal, also made a plea that in finding a solution, we do not end up going down the same route as for payment protection insurance (PPI), which he described as “an ambulance-chasing gift for solicitors of disreputable means”. Real scandals need serious answers.

Marc Sidwell is City A.M.’s managing editor.