Today, Chairman Johnson (D-SD) announced that Senate Banking will investigate the LIBOR scandal, grilling Secretary Geithner and Chairman Bernanke later this month and proceeding to additional action based on an ongoing staff investigation. Today’s House FinServ hearing on Dodd-Frank also engendered a lot of LIBOR talk and action demands. In this report, we assess key U.S. regulatory-policy issues raised by LIBOR, an issue that has, of course, exacerbated public and political distrust of large banks. However, regulators are also coming under renewed, unfavorable scrutiny, with this combination increasing calls for Glass-Steagall limitations on large banks and other sanctions. As detailed in this report, FedFin does not expect any of these policy demands to translate into near-term legislative action, but they will have direct impact on an array of pending rules. We also assess how this case could affect benchmark rates, CDS trading indices and other standards now delegated to the markets, concluding that the LIBOR scandal could lead to a raft of new rules with far-reaching market impact. In the wake of the financial crisis and numerous intervening events, FedFin also notes that this case could prompt very significant sanctions on U.S. banking organizations, sanctions going beyond the costly fines levied to date against Barclays possibly to include antitrust or related assertions. Although LIBOR’s impact will be fully known only after all of these enforcement actions and investigations conclude, a major underlying trend in large-bank regulation – pushing them towards a “utility” model – has been given increased momentum by this latest development.
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