Forex Probe Widens: A Blow for 8 Big Banks - Analyst Blog

On Monday, Switzerland's competition commission Wettbewerbskommission (WEKO) revealed the names of 8 big banks amid the widespread global investigation into the alleged foreign exchange rates manipulation. The regulator has openly confirmed the involvement of these banks in manipulation.

Notably, Swiss authorities became the foremost regulatory body to initiate a formal investigation into foreign exchange rate rigging. However, financial regulators in U.S., Europe and Asia are still investigating the role of the banks in the manipulation of currency rates. The foreign-exchange rates aid fund managers to assess the apparent day-to-day value of investments.

Banks under scrutiny include Swiss-based UBS AG UBS, Credit Suisse Group AG CS, Julius Baer and Zurcher Kantonalbank, JPMorgan Chase & Co. JPM, Citigroup Inc. C, Barclays PLC BCS and The Royal Bank of Scotland Group plc RBS. Most of these banks have refrained from issuing comments, while some have agreed to co-operate with regulators.

However, Credit Suisse has expressed its surprise over the allegation, as the bank was not under the purview of preliminary scrutiny by WEKO last year. Though the bank has referred to such accusations as incorrect and detrimental to its reputation, it is co-operating with the regulators.

The Commission is of the opinion that these banks' traders have fixed artificial benchmark foreign exchange rates after consultations among themselves to make profits. Further, such collusion among banks is believed to have affected the significant currencies during trading.

Manipulation of currency rates by major financial institutions triggered thorough investigations by regulatory bodies across Europe, Asia and America. Such investigations have cost several major global banks billions of dollars in settlements. Alongside, we apprehend such scandals to dent the financials of these banks over the long term.

Therefore, burdened under the pressure of such investigations, banks have terminated a number of traders along with the closure of electronic chat rooms – the mode of communication between various banks. Moreover, such probes are negatively impacting the markets as evident from the downturn in foreign exchange trading volumes in recent months.

According to WEKO, the investigation would be extended over months to get completed, and if found guilty, banks would be levied with heavy penalties. These fines are expected to be equivalent to 10% of the revenue produced by the banks from foreign exchange trading in Switzerland over the last three years.

Recently, in Feb 2014, Benjamin Lawsky, superintendent of New York's Department of Financial Services DFS also ordered currency probe for foreign exchange manipulation over a number of major banks. These banks included Deutsche Bank AG DB, The Goldman Sachs Group, Inc. GS and Lloyds Banking Group plc LYG among several others.

Regulatory authorities are investigating scandals related to the heightening foreign exchange rate fixing and are determined to put forward a landmark judgment to terminate such shrewd practices in the future, bring justice to the sufferers and punish the wrongdoers. While settlement of such issues will put to rest a long-drawn investigation and bring reprieve to the banks, this comes as a huge blow to their financials.