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Categorized | Banks, Insurance

Underwriters eye banks’ Libor exposure

Posted on July 31, 2012

Underwriters who cover bank executives and provide professional indemnity insurance are watching nervously as class action suits and legal demands mount against big banks caught in the Libor scandal.

Libor claims could be “a bigger game changer” for such insurers than the fallout from the financial crisis of 2008, according to one of the world’s biggest insurance brokers.

    “This impacts so many people,” says Richard Magrann-Wells, financial services leader at the broker Willis. “Trillions of dollars [worth of financial instrument] could be impacted.”

    If a class action suit goes the wrong way, “that’s the big scary thing”, says a financial services underwriter, pointing to a possible legal precedent in the US, the world’s litigation hotspot.

    Lawsuits by banks, funds and municipalities have been filed over the past year as regulators and prosecutors stepped up efforts to uncover alleged manipulation of the London Interbank Offered Rate, or Libor, and its Brussels and Tokyo equivalents, Euribor and Tibor.

    Banks’ potential exposure to those and future class actions have been estimated by analysts to be as high as $35bn. Plaintiff law firms have set the costs higher, with estimates of potential payouts reaching $1tn.

    “The fear is that Libor will become a litigation-fest for four years or more,” says Saul Haydon Rowe, a partner at structured credit specialist Devon Capital.

    While Libor was hitherto a technical financial term, it has become ingrained in the popular consciousness since Barclays paid £290m to settle with US and UK regulators last month.

    Since then, Barclays shares have fallen by as much as 16 per cent, wiping £3.4bn off its market value.

    The plummeting share price prompted some US investors earlier this month to sue the bank – adding to the legal problems facing the UK bank. Other plaintiffs who have filed class actions against the Libor panel banks include the City of Baltimore, the broker Charles Schwab and buyers of interest-rate derivatives.

    What differentiates the Barclays investors’ claim from others is that they are not maintaining that Libor fluctuations had a direct effect on purchases; rather they argue that they were harmed because Barclays lied about being a “model corporate citizen” and they blame it for causing the drop in the share price

    Regulatory settlements do not shelter defendants from class-action payouts.

    Any findings by regulators of collusion – and settlements tend to be reached by defendants making admissions, or not contesting facts – could be particularly troublesome for the banks because antitrust cases in the US can potentially award treble damages; this can be limited to actual damages for those who won leniency through co-operation with authorities.

    The UK does not have a class-action system and awards tend to be far lower in comparison with the US. Commercial-court judges in London will also be wary of handing down a decision that could “open the flood gates” and risk unravelling worldwide contracts based on Libor, according to Simon Hart, a litigator at Reynolds Porter Chamberlain.

    However, existing lawsuits filed in London against Barclays and other banks over alleged mis-selling of interest-rate swaps are now studying whether Libor-rigging accusations can be included in their complaint, says Susannah Sheppard, a lawyer at Sheppard & Smith.

    Ms Sheppard is examining potential collusion arguments for Guardian Care Homes, which is already suing Barclays for £12m over how it was sold interest-rate swaps.

    As banks enter reporting season, there will be much scrutiny over their stated planning around the Libor probe, because under US accounting guidelines, banks and other companies are required to disclose potential litigation risks and estimate their costs.

    In the case of Barclays, which published its financial results on Friday, it disclosed for the first time that it had set aside £450m for potential claims from allegations of mis-selling of interest-rate swaps.

    Insurers are unlikely to wait to see what the courts do. With policies renewed annually, a hesitancy in the market is palpable, brokers warned.

    “You’re not going to see a large number of new carriers wanting to jump in when there’s been major, major losses,” says Mr Magrann-Wells of Willis.

    Reporting by Lina Saigol, Caroline Binham and Alistair Gray