RBC’s other problem: Freddie Mac names embattled bank in LIBOR suit

Another dark cloud for RBC.

 
(Photo: Mario Beauregard/CP)
(Photo: Mario Beauregard/CP)

The Royal Bank of Canada has had a tough couple of months, most recently reeling from an out-of-nowhere scandal involving the use of foreign workers to replace some of its Canadian IT staff. Lost in that noise is a potentially more significant development that surfaced in March: Canada’s largest bank has been named as a defendant by U.S. mortgage giant Freddie Mac for alleged manipulation of LIBOR, the London Interbank Offered Rate, an interest rate benchmark off which international banks lend among themselves.

If there is a silver lining in the March 14 Eastern District of Virginia filing, it’s that RBC is being sued for fraud only, while several other institutions, including Bank of America, Deutsche Bank and Barclays, are being sued for fraud and breach of contract. Nevertheless, the charge casts a shadow over a Canadian banking system that so far has escaped serious scrutiny with regard to the LIBOR scandal.

The suit alleges that the rate-fixing effectively limited consumer choice and diminished the quality of financial products tied to U.S.-dollar LIBOR. It further charges that “Freddie Mac suffered damages from the artificial suppression of LIBOR in the form of, among other things, lower interest payments on financial products that incorporate LIBOR.”

The scandal broke last June, when British and American regulators accused several of the 18 banks on the U.S.-dollar LIBOR panel of rigging the interest rates that are used as a reference for activity ranging from mortgages to derivatives contracts. The total value of such activity is pegged at US$350 trillion. Since then, UBS, Barclays and Royal Bank of Scotland have admitted guilt to British and American regulators and paid fines totalling US$2.5 billion.

RBC is the only Canadian bank on the U.S. dollar LIBOR panel. (It’s also one of nine banks on the Canadian-dollar LIBOR panel.) While RBC was subpoenaed on at least one other occasion—by New York’s attorney general in October 2012—it has so far escaped any dings to its reputation or pocketbook. The Freddie Mac suit thus comes as an unwelcome development. In an e-mailed statement, RBC spokesperson Kevin Foster declined comment, citing “ongoing litigation.” The bank’s only other statement on LIBOR came in July 2012 when it e-mailed Bloomberg News to deny any wrongdoing.

Freddie Mac notes it is a plaintiff in other class-action lawsuits pertaining to LIBOR, all of which are either still pending or ongoing. The case naming RBC, says spokesperson Brad German, “was filed to preserve some individual claims that were determined not to have been covered in some of the other suits.”

RBC seems to be trying to keep a low profile, and analysts say it’s too early for shareholders to worry about outcomes. “When you look at the world and all the other uncertainties that are out there…[LIBOR is] probably not high up on RBC’s radar screen in terms of its problem set,” says Bradley Smith, director of research at Stonecap Securities. “There are lots of other things like slowing growth, and net interest margins that won’t get going, and the brouhaha over trying to outsource 45 jobs.”

But analysts say that could change fast. There have been wildly divergent estimates about how much the various LIBOR civil suits and penalties will cost the banks involved, from a few billion to over US$160 billion. Tom Lewandowski, financial services analyst at Edward Jones, says the figure can’t be reliably estimated and that at present it’s no reason not to own shares in RBC. The Freddie Mac filing does not specify damages.

All of Canada’s big banks face other headwinds—including increased regulation and higher capital requirements—that affect performance, so teasing out the impact of LIBOR is difficult. “It could eventually have some kind of actual cost associated with it,” Lewandowski says. But for now the worst it’s doing is causing some analysts to discount the ways they value the defendant companies.

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