Will the LIBOR scandal be the one to take down the banking system?


As the LIBOR scandal evolves, analysts who at least at first thought it wasn’t a huge deal have been backpedaling, and those who recognised it for the far-reaching mess that it is have been proved right. The proof of the importance of any issue is how it affects the involved parties’ bottom lines, and it looks like Barclays bottom is beginning to smart.

The English city of Leicester has removed its US$9 million worth of deposits from the bank, and the Japan Bank for International Cooperation left Barclays out in the cold on its latest bond deal. The bank had worked with Barclays in the past on such projects, which have produced spectacular fees for England’s third largest bank. In both cases, the reasons given for the snubs had to do with the LIBOR debacle.

Other banks are getting nervous
So far, Barclays has paid more than US$450 million in fines for its involvement in the scandal, and the effect on its business may cause other banks to step up damage control. Deutsche Bank has offered up evidence of its own malfeasance in hopes of securing reduced fines, and UBS (NYSE: UBS) is in good stead as the first bank to admit wrongdoing as the scandal began to unfold earlier this year.

American banks will be grilled, as well. Well over a year ago, The Wall Street Journal reported that regulators were eyeing Bank of America (NYSE: BAC) and Citigroup (NYSE: C) for their parts in possible LIBOR rigging for the years 2006-2008, so it certainly seems likely that they will once again questioned. JPMorgan Chase (NYSE: JPM), already under scrutiny for its trading problems, sat on the LIBOR panel during that time and will doubtless join B of A and Citi on the hot seat. Goldman Sachs and Morgan Stanley (NYSE: MS), however, are sitting pretty right now, since so far they seem not to have been involved in the scandal and may be in line to pick up investment business from other banks as contracts are lost because of tarnished reputations.

Fool’s take
It has taken quite a long time for the scandal to balloon to its current proportions, and I have no doubt that it will draw in many more financial entities as its tentacles spread. Banks are certainly no strangers to scandal, but this one promises to turn the entire sector on its head. Could this turn out to be as serious a problem as the 2008 financial crisis? It looks possible, even probable, with one important difference: Regulators are handing out fines this time, instead of bailouts. If this latest instance of apparent malfeasance drives business to smaller competitors, banks just might just be solving the “too-big-to-fail” problem themselves.

If you’re in the market for some high yielding ASX shares, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

 More reading

The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Amanda Alix, originally appeared on fool.com

OUR #1 DIVIDEND PICK FOR 2016...

Forget BHP and Woolworths. This "dirt cheap" company is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for hungry investors, including SMSFs, this ASX company could be the "holy grail" of dividend plays for 2016.

Enter your email below to discover the name, code and a full investment analysis in our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2016.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.