Moody’s Warn Libor Scandal Could Affect Banks’ Credit Ratings

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The credit ratings agency Moody’s has warned that the ongoing Libor scandal could see the credit rating of the banks involved dropped, which would affect the amount they are charged on loans or debt that they hold from other businesses as the risk of them defaulting is seen to increase.

The reason behind the warning is not to do with the fines that are likely to be levied on the companies involved, according to Moody’s, but because of the potential for claimants to come forward and argue that they were paying too much for their loans due to the rigging, meaning they are entitled to compensation from the banks.

In a statement, Moody’s said “compared to regulatory investigations, we see litigation risk, particularly in the US, as posing greater credit risk for both US and non-US panel banks. This is based on our view that successful litigation, especially if it involves a class action, could result in awards to plaintiffs that are significantly larger than the likely regulatory fines […] Moody’s will monitor this case closely to see how the Libor-fixing allegations are handled in the context of the mis-selling allegations, which rely on other aspects of the suitability of the products for the investor.”

Regulators have already been contacting traders at the banks involved as part of an ongoing investigation, but so far only Barclays has been fined. As more details emerge, lawyers will be compiling more facts and information about the case to see if litigation against the banks will be possible.

HSBC have already set aside huge amounts for compensation for an unspecified reason, and many banks are paying out huge figures for mis-selling PPI on their loans already. It’s easy to see why the credit ratings agencies could view this as a risk to the banks’ abilities to repay debt, but what isn’t clear is what the larger effects on financial markets will be as a result of this.