Why has ASIC launched a rate rigging suit against the CBA?

Ross Greenwood speaks to Martin North from Digital Finance Analytics regarding Australia’s corporate watchdog, ASIC,  launching proceedings against the CBA, alleging it rigged key interest rates in 2012.

Introduction: Why has ASIC launched a rate rigging suit against the CBA?

Ross Greenwood: There’s been a bit of breaking news in the corporate world. Just 24 hours or a little bit longer, the Commonwealth Bank announced its new Chief Executive, Matt Comyn. The Australian Securities and Investments Commission, Australia’s corporate watchdog, has launched civil proceedings against Australia’s largest bank with allegations that it had rigged key interest rates.

Now, there’s a key business lending interest rates, the Bank Bills Swap Rate. Now, the Commonwealth Bank, previously, had been considered to be somehow immune from these allegations. The reason for that is because, previously, ASIC has taken out similar proceedings against the ANZ and National Australia Bank, both which had settled for a reported $50 million each.

Now, there were also allegations made against Westpac. Westpac did not settle and went through the courts. During all of this period, there was nothing against the Commonwealth Bank. Now, yesterday, as the new Chief Executive was announced, Matt Comyn, the Chair of the Commonwealth Bank, Catherine Livingstone, indicated that she believed that there were no more scandals inside the Commonwealth Bank.

As a result of that, it was one of those points where– given the fact there’s a Royal Commission in the bank’s coming, given the fact that the Commonwealth Bank already has the upper investigation and a massive legal case coming in regards to those automated teller machines and the allegations from AUSTRAC, that those machines allowed money laundering to take place through them. This is a key thing. Now, let’s go just a little over 24 hours ago. Catherine Livingstone, the Chair of the Commonwealth Bank, talking about where they’re up to with the scandals. This is about the Royal Commission on whether it potentially might find even more.

Catherine Livingstone: We are finalizing our submission today. Our intention is to be absolutely transparent with the Royal Commission. It’s far better that we are aware of the issues and that we have identified the issues and that we’re working on addressing the issues than waiting for others to identify them. Our focus is absolutely on transparency and really getting on with fixing what we know needs to be fixed.

Ross Greenwood: I was trying to find out what implication this has for Australia’s largest bank. Martin North is one of the key banking analysts in Australia with Digital Finance Analytics. He’s on the line right now. Martin, many thanks for your time. Can you just explain what impact this might have on the Commonwealth Bank, given the upper investigation, given the allegations made by AUSTRAC and given the Royal Commission into Australia’s banks?

Interview with: Martin North, Digital Finance Analytics

Martin North:  Well, you can say it never rains, but it pours. It seems to me that this is, yes, another example of, potentially, poor behaviour in the bank. Yet, it’s hard to know, of course, because they must have known that there were conversations going on with ASIC about this. This whole BBSW thing is actually very significant because of course, even small changes to the rates, generate massive amounts of profit for the traders. You can understand perhaps why people would try and push the roads a little bit.

The fact of this was completely silent until today, highlights, I think, that there are issues in terms of culture with inside the bank.

Perhaps, there’s still a journey to go to really understand in full, all of the various moving parts within the bank and all the various risk elements within the bank. This is big deal, I think.

Ross Greenwood: We should make the observation that the allegations relate to a period between January and October in 2012. We’re talking almost six years ago. The second thing is also the allegations, unconscionable conduct, and market manipulation. Now, the whole fact about it, as you point out, is bank bill swap rate, small movements in that bank bill swap rate, if you’re able to massage it in some way, would lead to significant profits for the bank. What we’ve seen in the allegations against the other banks, is the conversations that took place between traders to figure out whether they were trying to massage the rates to the detriment of their customers to make more profits for the bank.

That’s where a lot of risks, isn’t it?

Martin North:  Well, it is. Of course, it’s interesting. Because even players like you– yes, for example, the Royal Bank of Scotland was also caught up in this in 2012, when in fact that they paid big funds as a result of it. This is something at the very heart of the way banking works. Now, of course, what’s happened is that the BBSW, the bank bill swap rate calculations been moved. The ASX now has a responsibility for it, whereas previously, it was. This is a, fundamentally, critical path. Of course, interestingly, that it’s liable in the UK and some of the other rates around the world.

This is not an isolated incident where the core benchmark rate is seen to be fiddled. This is really very important because it’s fundamentally structured around the way that pricing of the products work. Which means people may well have paid more than they should have for their mortgage or for their business finance and those sorts of thing. There are some interesting consequences if they are found to have messed with the rate. There are implications, which I think the Royal Commission maybe want to look at.

Ross Greenwood: Okay. Then, you get the timing of this, because ASIC has chosen to land this on the Commonwealth Bank a day after the Chair, Catherine Livingstone, had indicated, “It’s best if, we, the Commonwealth Bank uncover our own scandals as compared with a Royal Commission or the banking regulator, APRA, on covering our scandals.”

It seems now that ASIC had wanted to simply drop it on it, although there is some suggestion that even ASIC was getting close to its statute of limitations of six years. Really, it had to drop this on the Commonwealth Bank as soon as possible.

Martin North:  Yes. I did a quick calculation. They were pretty close actually to the six-year cut off point. I still think that somewhere inside the CBA, people must have known that this issue hadn’t gone away. It should have been on the table. It should have been on their list of risks inside the bank. Once again, their risk management process was found wanting.

Ross Greenwood: It’s always good to have you on the program, Martin North from Digital Finance Analytics. That is a big thing for the Commonwealth Bank. You’ll hear a lot more about that in the next little while.

 

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