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Tuesday, May 21, 2024

Banks face potential rate scandal

Norwegian banks are facing claims by several international financial institutions that they’ve been manipulating their interbank lending rates. Norway’s central bank, Norges Bank, is worried and has asked financial regulators to investigate.

“If this isn’t market manipulation, I don’t know what is,” a large, international bank wrote in a letter to Norges Bank and obtained by newspaper Aftenposten. The central bank thus reportedly fears an interest rate scandal.

The central bank has asked Finanstilsynet (The Financial Supervisory Authority of Norway) to consider an investigation of potential Norwegian rate manipulation, according to letters in the newspaper’s possession. The bank is quoted as saying that “it is hard to assess” the claims, “but the fact that international banks are claiming this is on its own reason for concern.” It is unclear which international banks are behind the claims.

Alleged deviation
Nibor (Norwegian Interbank Offered Rate) is the daily interest rate set on loans between banks and is a calculated average of six different banks’ estimates for what they would expect to pay for borrowing from other banks. These banks are DNB, Nordea, Danske Bank, Handelsbanken, SEB and Swedbank.

The rate is not based on the local currency but on international money market rates based on the US dollar. According to Norges Bank, the rate can be manipulated if banks estimate a rate that deviates from the assumed market rate.

The money market rate is important for the lending rate on many loans in Norway. The rate is often used as a reference for other financial instruments such as derivatives and securities as well as banks’ lending rates to businesses and for larges loans from the market.

May hurt lending market rates
“There clearly are grounds to look closely at these allegations,” Thore Johnsen, professor in finance at the Norwegian School of Economics (Norges Handelshøyskole, NHH), told Aftenposten. “Nibor is an important reference for rates in the Norwegian market. For this to work, it is imperative that it is not being manipulated.”

He said the confidence in Nibor is crucial for the Norwegian lending market. “If the confidence in Nibor is hurt, we may end up with a less-efficient lending market. This again may hurt lending to businesses through a higher rate,” Johnsen said.

”Banks obviously can have an interest in raising or lowering the rate on a specific date based on bets they have made about where rates are heading,” Johnsen said. But he said those placing these bets are not the same as those estimating the rates. ”It is neither always clear whether the bank will lose or make money on a higher rate due to fluctuations in lending and borrowing,” Johnsen told Aftenposten.

Banks brush off accusations
“We have no reason to believe Norwegian banks are manipulating the money market rates because the system is so transparent,” Jan Digranes, head of the bank’s own business organization, Finance Norway (FNO), told Aftenposten.

Digranes cited the larger fluctuations in Nibor compared to similar international rates by how it is estimated and added; “The Norwegian market is small with few players. This may result in large fluctuations.”

Potential rate manipulation is under investigation in several other countries. Two of the world’s biggest banks in the UK and the US, Barclays and UBS, have accepted huge fines after the so-called “Libor-scandal.” Libor (London Interbank Offered Rate) and the Norwegian Nibor rate are not directly comparable but they both fill many of the same functions in the market and are similarly set. An additional 10-12 banks are under investigation.

Views and News from Norway/Aasa Christine Stoltz

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