Here’s Why the European Union Is Fining Investment Banks


Several prominent investment banks are set to be fined by the European Union for attempting to manipulate Euribor, a type of interest rate in the region, Reuters reports.

The European Commission has accused investment banks of trying to fix Euribor, which is used as a benchmark for determining the value of financial contracts and derivatives, meaning that it impacts the operations of investment banks to a great extent. Manipulating the Euribor rate, as the banks are accused of, is illegal under the laws of the EU.

The commission is not going easy on banks: The organization will be fining the institutions in accordance with EU law, which allows fines of up to 10 percent of a company’s overall revenue in cases of wrongdoing. In this case, the fines are expected to be far less than the maximum possible penalty, but even a small fine, percentage-wise, could still amount to millions if not billions of euros’ worth of penalties for the banks.

Among those accused of wrongdoing are JPMorgan, Deutsche Bank, RBS, and HSBC. Barclays, which alerted the commission of the illegal activity, will not incur any penalties. For the banks that stand to pay fines, there are several options to try and alleviate the costs.

One possibility is to admit guilt, which can lead to a reduction in the penalties. On the other hand, this could open up the institutions to potential lawsuits from customers who have been wronged by their actions. Another option is for banks to contest the case in court, though this could also prove both lengthy and costly.

The announcement comes as a second round of fines may be in the works for banks that were caught manipulating Libor, the London Interbank Offered Rate. Libor is used when banks lend money to each other and is set in the British capital. Other possible investigations include the illegal manipulation of Japanese interest rates and outlawed dealings involving credit derivatives between investment banks, according to several reports.

All of the regulation has taken its toll on the region’s financial institutions. In the case of Deutsche Bank, legal costs alone totaled more than 1 billion euros in the third quarter. This eats into banks’ profit margins, in turn meaning that costs must be passed on to consumers. In this respect, the hidden cost of an increasingly regulated financial market is borne by European citizens just as much as it is by banks and governments.

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