US government files $400bn Libor case lawsuit in London court

The US Federal Deposit Insurance Corporation (FDIC) has filed a lawsuit against a number of European banks in a London court in what could be a pivotal moment in the Libor scandal.

The unusual step comes after a similar suit filed in New York was thrown out of a federal court, after a judge argued the court lacked jurisdiction to pronounce itself on the case.

According to documents filed at the High Court last month, Barclays, Deutsche Bank, UBS, Royal Bank of Scotland and Lloyds Banking Group are among the banks sued by the FDIC, which oversees the winding down of failing banks.

The corporation has also sued the British Bankers' Association (BBA) - now part of industry lobby group UK finance - accusing it of colluding with a number of lenders to carry out the "sustained and material suppression of Libor between August 2007 until at least the end of 2009".

The FDIC said it has brought the lawsuit on behalf of 39 US banks it had to rescue in the wake of the financial crisis, adding the lenders unfairly lost out as the US-dollar denominated variant of LIbor was rigged.

According to separate reports by The Times and the Financial Times, while the corporation has not put a figure to its claim it has stated the banks it represented were worth a combined $440bn and produced a combined turnover of over $114bn by the end of 2007.

Libor, or the London interbank offered rate, serves as a benchmark for trillions of dollars of transactions and is regularly used to set rates for credit cards, loans and mortgages. It is assessed on the basis of submissions by banks that sit on the Libor assessment panel.

Investigators in the US, UK and Europe have launched extensive probes into a number of banks to establish whether lenders deliberately manipulated Libor rates for their own profit.

"Each bank defendant had a common financial and profit-based incentive to collude to lowball [US dollar-denominated] Libor submissions and in turn to cause US dollar Libor to be lower than it otherwise would have been," the FDIC claimed.

"A lower US dollar Libor (and prior knowledge of the suppression of the rate) enabled the bank defendants (and any other bank parties to the agreement or concerted behaviour) to adjust their trading positions and profit form downward movements in interest rates and/or from decreased borrowing costs."

Last month, the Financial Conduct Authority (FCA) announced the UK will discontinue using the much maligned interest rate benchmark Libor and introduce a substitute by the end of 2021.

The benchmark, which has been used to price financial contracts since 1986, ranging from personal loans to mortgages worth over $350trn (£266.50trn) has been the subject of much controversy in recent years.

Banks have been fined billions of dollars for trying to manipulate Libor, with at least eight traders jailed for manipulating the benchmark either side of the Atlantic.

Andrew Bailey, chief executive of the FCA, said work must "begin in earnest" on shifting to an alternative index, adding that the end of 2021 would offer ample time to ensure a smooth transition.