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Sunday, 13 January 2013

Are the rats leaving the sinking ship? Euribor suffers from a small exodus of banks in the aftermath of Liborgate.

Oh no, not me, Im a man of repute.
But the devil caught hold of my soul
and a voice called out shoot!

During the last months, the Euribor group (i.e. European Interbank Offered Rate) – the pan-European counterpart of the worldwide accepted Libor (London Interbank Offered Rate) interest rate – suffered from an unexplained exodus of banks that officially settled the Euribor rate until recently.

From the original 44 banks in 2012, only 39 are left now and another candidate for leaving the Euribor group might be ahead. The following banks have already left the Euribor settlement group: Rabobank, Raiffeisenbank Austria AG, Landesbank Bayern (Bavaria), Citigroup inc. and DekaBank Group. The Austrian lender Erste Group Bank AG is currently reviewing its options.

This exodus among the Euribor banks cannot be seen separated from the Liborgate investigation that is hanging above the market like Damocles’ sword. Barclays PLC in the United Kingdom and UBS AG in Switzerland already admitted last year having rigged the Libor rate.

Also the Dutch Rabobank – one of the five banks now leaving the Euribor group- admitted last year that a few members of its personnel were involved in the Libor-manipulation, a fact for which they were fired a few years ago. 

The Rabobank stated that it left the Euribor-group for business-economical reasons; an explanation that must be taken with a pinch (or two) of salt unfortunately.

In my humble opinion, Rabobank – and with them some other banks, I presume – is  afraid that the investigations into Libor will be stretched out to the Euribor group as well.

Perhaps, in a transparent attempt to escape the wrath of the European and United States supervisors, these banks toss the white flag and call it a day within the Euribor group, in order to cut their losses and do anything possible in damage control. This is the reason that I suspect more banks to follow their example.

The Wall Street Journal wrote on this developing story:

Worries are mounting about one of Europe's benchmark interest rates, after another bank on Wednesday decided to abandon the panel that sets the rate.

In the past four business days, three European banks have said they will stop providing data to help set the euro interbank offered rate, or Euribor, which serves as the basis for interest rates on trillions of euros in loans and other financial contracts. The latest, on Wednesday, was Austria's Raiffeisen Bank International RBI.VI +0.07% AG. Another Austrian lender, Erste Group Bank AG, EBS.VI +0.25% said Tuesday that it is reviewing its options. The departures leave 39 banks on the panel, from a peak of 44 in 2012.

"I am very concerned with the situation, absolutely. This is a serious situation," said Cedric Quéméner, a director of Euribor-EBF, whose members in the European Banking Federation set Euribor.

"Euribor needs to be reformed and quickly. Banks leaving set a bad example for other contributing banks," Mr. Quéméner said in an interview. "If we have more banks leaving, we may have no more Euribor."

Like its more-prominent cousin Libor—the London interbank offered rate—Euribor has come under scrutiny about whether banks have manipulated the rate. Barclays BARC.LN +1.71% PLC and UBS AG admitted last year that employees tried to manipulate Libor. The European Union is nearing completion of an investigation into potential collusive activity by banks in the setting of Euribor.

Euribor was set up by the European Banking Federation in 1999 to establish a new interbank reference rate within what is now the 17-country currency union. In addition to serving as a benchmark for trillions of euros in savings and loans, the European Central Bank also uses it as a factor in its monetary-policy decisions. Many mortgages across Europe track Euribor rather than the ECB benchmark rate.

The three banks that have recently left the rate-setting panel have pointed to business reasons like shifting internal priorities and what they describe as a shrinking in the bank-to-bank lending market as reasons for their departure.

Last Friday, Bayerische Landesbank and Rabobank both pulled out. Erste Group Bank said Tuesday it is also reviewing its options for its membership. Citigroup Inc. C -1.14% and Germany's DekaBank Group withdrew from the Euribor panel in 2012. Mr. Quéméner said banks "normally" have to give around 10 days' notice before they stop quoting rates.

"As of this moment there are no other banks looking to leave the Euribor panel," he said.

Although the Euribor rate is less important from a global point of view, it is much harder to rig than the Libor rate. The latter rate is settled by only 18 banks, while the former had 44 banks to settle the rate in 2012 and now still consists of 39 banks. This is a much larger group of banks, making conspiracies between groups of banks much harder and diminishing the influence of one single bank on the result of the rate settlement process.

However, it is of course more than just a wild presumption that the Euribor rate is rigged too. Why would this rigging be exclusively the domain of the Libor-rate?! The worldwide banking industry has shown over the last decades that it plays for keeps: within the rules and when the rules were too restrictive, even outside those rules. Besides that, many of the banks that are involved in settling the Libor-rate, are also involved in settling the Euribor rate.

in order to muck out the dirty stables called Libor and Euribor, the international supervisors might use any means possible to get their grasp on the perpetrators among the international banks.

In the case that other banks would get caught in rigging the Libor and/or Euribor rates, this will presumably lead to penalties in the billions of dollars for the banks and – on top of that – many years of imprisonment for the executive managers of these banks.

In that case, the battle between the international supervisors and the executive managers of the global system banks would approach Genesis’ Battle of Epping Forest much closer than many bankers would like for their good health.

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