Barclays, Lloyds and RBS are subject of 'largest ever' Libor lawsuit

Three major British banks, Barclays, Lloyds and the Royal Bank of Scotland (RBS), are among nine banks named in what could prove to be the largest lawsuit yet over the manipulation of lending rates.

The Federal Deposit Insurance Corporation, a US agency that rescued 39 banks during the 2008-2009 crash, has filed a claim in the High Court over alleged "lowballing" of the London Interbank Offered Rate, or Libor.

The agency, which was set up during the Great Depression, is claiming for losses incurred by the banks it saved thanks to the "sustained and material suppression" of the US dollar-denominated version of Libor between 2007 and 2009.

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"Unlike other Libor claims, the corporation is interested only in banks' lowballing of Libor and claims that the lenders and the [British Bankers' Association] knowingly did business linked with the discredited rate despite being aware that it was skewed in their favour," says The Times.

There is no value put on the claim, but the 39 banks are said to have been worth a combined $440bn (£340bn) with an aggregated turnover of $114bn (£88bn) at the end of 2007.

At the time, Libor was based on submissions from a panel of 16 banks.

A representative of each bank submitted the rates at which it could theoretically borrow funds from its peers. The highest and lowest numbers were excluded and an average taken of the rest to set the published figure every day.

Around $350trn (£270trn) of transactions are based on Libor. Several bankers have gone to prison for manipulating the rates to benefit their own trading books. Banks including Barclays and RBS have been fined $9bn (£7bn).

But there have also been accusations that the Bank of England and other regulators were aware of – and even encouraged – "lowballing" during the crisis, in order to prevent a spiralling of the credit crunch.

Writing on Forbes Tim Worstall says there is a "serious problem" with the complaints over the "rigging" of Libor. He says this activity was "actually exactly what we wanted to have done at that point in time".

He argues that long-term lending was more or less non-existent at the time so the real rate would be "infinite". Quoting the rate accurately "just wouldn't have been helpful".

Libor is now set with more reference to real-world transactions. The Financial Times says the regulator wants to move to wholly "transaction-based benchmarks" by 2021.