Deutsche Bank has been fined £227m by the Financial Conduct Authority (FCA) and altogether hit with £1.5bn ($2.5bn) in global fines over LIBOR and EURIBOR failings in the largest ever inter-bank rating misconduct to date
Deutsche Bank's shares plunged, falling by 62 euro cents (2%) as the FCA announced the fine – which related to manipulation of the Interbank Offered Rate (IBOR) across all currencies at Deutsche Bank trading desks between January 2005 and December 2010 - saying it is ‘so large because Deutsche Bank also misled the regulator, which could have hampered its investigation’.
IBOR is used to determine payments made under both over the counter (OTC) interest rate derivatives contracts and exchange traded interest rate contracts by a wide range of counterparties including small businesses, large financial institutions and public authorities.
Benchmark reference rates such as LIBOR also affect payments made under a wide range of other contracts including loans and mortgages. The integrity of benchmark reference rates such as LIBOR is therefore of fundamental importance to both UK and international financial markets
The hefty fine comes as a result of collective effort between the FCA and US resulting in the Commodities Futures Trading Commission also imposing an $800m (£532m) fine.
The US Department of Justice has already imposed a financial penalty of $775m and the New York Department of Financial Services has imposed a fine of $600m.
LIBOR and EURIBOR are based on daily estimates of the rates (submissions) at which banks on a panel can borrow funds in the inter-bank market. They are fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.
The FCA’s investigation revealed the breach involved at least 29 Deutsche Bank individuals including managers, traders and submitters, primarily based in London but also in Frankfurt, Tokyo and New York.
The FCA said that the bank’s misconduct indicated the seriousness of its failings and the potential they had to have a significant impact on the markets.
Traders at Deutsche Bank used a three pronged approach to attempt to maximise the impact on EURIBOR. These included influencing Deutsche Bank’s submitters to alter the Bank’s EURIBOR submissions; collusion with other banks that sat on the panel that submitted the rates on which EURIBOR is based and request that they alter their submissions; and on occasion, offering or bidding cash in the market to create the impression of a change in the supply of funding in order to influence other panel banks to alter their submissions.
This misconduct went unchecked because of Deutsche Bank’s inadequate systems and controls, in addition to a lack of systems and controls specific to IBOR.
Even after being put on notice that there was a risk of misconduct, the bank failed to put these in place.
‘What is more, Deutsche Bank had defective systems to support the audit and investigation of misconduct by traders. For example, the bank’s systems for identifying and recording traders’ telephone calls and for tracing trading books to individual traders were inadequate.
‘As a result, Deutsche Bank took over two years to identify and produce all relevant audio recordings requested by the FCA,’ the regulator said.
Failure to openly cooperate
The bank exhibited further shocking conduct in that it gave the FCA misleading information in relation to its ability to provide a report commissioned by the German regulator, BaFin.
‘Deutsche Bank did not disclose the report to the FCA and claimed that BaFin had prevented it from being shared when this was untrue,’ the FCA said.
In addition, Deutsche Bank lied to the FCA as to assurance of its systems and controls in relation to LIBOR.
‘This was despite the complete lack of IBOR systems and controls. It was known to be false by the person who drafted it.
‘The FCA’s investigation was made more difficult and was delayed because Deutsche Bank failed to provide timely, accurate and complete information.
‘In one instance, Deutsche Bank in error destroyed 482 tapes of telephone calls, which fell within the scope of an FCA notice requiring their preservation. Deutsche Bank also provided inaccurate information to the regulator about whether other records existed,’ the FCA revealed.
Deutsche Bank settled at an early stage of the investigation, qualifying for a 30% discount on its fine, without which the fine would have been £324m.
Georgina Philippou, acting director of enforcement and market oversight, said the case stands out for the seriousness and duration of the breaches by Deutsche Bank – which is reflected in the size of the fine.
‘One division at Deutsche Bank had a culture of generating profits without proper regard to the integrity of the market. This wasn’t limited to a few individuals but, on certain desks, it appeared deeply ingrained.
‘Deutsche Bank’s failings were compounded by them repeatedly misleading us. The bank took far too long to produce vital documents and it moved far too slowly to fix relevant systems and controls.
‘This case shows how seriously we view a failure to cooperate with our investigations and our determination to take action against firms where we see wrongdoing,’ said Philippou.
Banks’ misconduct
Other banks have also been slapped with heavy penalties for LIBOR and EURIBOR manipulations:
- June 2012: the Financial Services Authority, the FCA’s predecessor, fined Barclays Bank plc £59.5m
- December 2012: the FSA fined UBS AG £160m for significant failings in relation to LIBOR and EURIBOR
- February 2013: the FSA fined The Royal Bank of Scotland plc £87.5m for misconduct relating to LIBOR
- September 2013: the FCA fined ICAP Europe Limited £14m
- October 2013: the FCA fined Rabobank £105m
- May 2014: the FCA fined Martin Brokers £630,000
- July 2014: the FCA fined Lloyds Bank Plc £50m for misconduct relating to LIBOR
