Updated 07/27/2012 06:24 PM
Officials investigate Bank of America for involvement in British interest rate-rigging scandal
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CHARLOTTE – Bank of America executives acknowledge investigators are looking into the bank's involvement in a British interest rate-rigging scandal.
"We've received and are cooperating with the inquiries we're getting from both the U.S. and the foreign regulators,” said Bank of America Chief Financial Officer Bruce Thompson in a call with analysts last week.
Regulators want to know if some of the world's biggest banks intentionally manipulated an interest rate to their own benefit. Barclay's, a British bank, has admitted some involvement. Bank of America has not been officially accused of wrongdoing in the Libor scandal, but is under investigation since it is among 15 banks that set the benchmark rate.
If the scandal is as bad as regulators fear, the impact could shake the global financial system.
"It has implications. The problem with the Libor is that it is structurally flawed," said Harry Bowen professor of international business and finance at Queens University.
The London Interbank Offered Rate, Libor for short, is an average the banks set each day for the cost of interest they would pay on unsecured loans from another institution.
"You're on your honor system and it's in your interest, we hope, to report an honest number based on your best guess," said Bowen.
Therein lies the problem, critics say. Since the Libor is set on the honor system, banks can under- or over estimate their Libor numbers, gaming the system to make money.
A report from financial research firm Keefe, Bruyette and Woods estimates Bank of America could be on the hook for as much as $4.2 billion in legal settlements related to Libor, should the bank be found culpable for losses.
The bank already faces a lawsuit from Charles Schwab about the issue. Regardless of who is responsible, Bowen said regulators need to take steps to make Libor trustworthy.