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The Effect of the Libor Scandal on Bank Returns

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UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER’S THESIS THE EFFECT OF THE LIBOR SCANDAL ON BANK RETURNS Ljubljana, October 2017 LUKA VIDONI AUTHORSHIP STATEMENT The undersigned Luka Vidoni, a student at the University of Ljubljana, Faculty of Economics, (hereinafter: FELU), author of this written final work of studies with the title The Effect of the Libor Scandal on Bank Returns, prepared under supervision of prof., dr. Aljoša Valentinčič DECLARE 1. this written final work of studies to be based on the results of my own research; 2. the printed form of this written final work of studies to be identical to its electronic form; 3. the text of this written final work of studies to be language-edited and technically in adherence with the FELU’s Technical Guidelines for Written Works, which means that I cited and / or quoted works and opinions of other authors in this written final work of studies in accordance with the FELU’s Technical Guidelines for Written Works; 4. to be aware of the fact that plagiarism (in written or graphical form) is a criminal offence and can be prosecuted in accordance with the Criminal Code of the Republic of Slovenia; 5. to be aware of the consequences a proven plagiarism charge based on the this written final work could have for my status at the FELU in accordance with the relevant FELU Rules; 6. to have obtained all the necessary permits to use the data and works of other authors which are (in written or graphical form) referred to in this written final work of studies and to have clearly marked them; 7. to have acted in accordance with ethical principles during the preparation of this written final work of studies and to have, where necessary, obtained permission of the Ethics Committee; 8. my consent to use the electronic form of this written final work of studies for the detection of content similarity with other written works, using similarity detection software that is connected with the FELU Study Information System; 9. to transfer to the University of Ljubljana free of charge, non-exclusively, geographically and time-wise unlimited the right of saving this written final work of studies in the electronic form, the right of its reproduction, as well as the right of making this written final work of studies available to the public on the World Wide Web via the Repository of the University of Ljubljana; 10. my consent to publication of my personal data that are included in this written final work of studies and in this declaration, when this written final work of studies is published. Ljubljana, 23.10.2017 . Author’s signature: Luka Vidoni . TABLE OF CONTENTS INTRODUCTION ............................................................................................................... 1 1 LIBOR, LIBOR SCANDAL AND THE BANKS ..................................................... 2 1.1 The London Interbank Offered Rate ....................................................................... 2 1.2 Overview of banks involved into Libor scandal ..................................................... 5 1.2.1 Barclays ........................................................................................................... 6 1.2.2 Citigroup .......................................................................................................... 6 1.2.3 Credit Suisse .................................................................................................... 6 1.2.4 Deutsche Bank ................................................................................................. 7 1.2.5 JPMorgan & Chase .......................................................................................... 7 1.2.6 Lloyd’s ............................................................................................................. 8 1.2.7 RBS .................................................................................................................. 8 1.2.8 Société Générale .............................................................................................. 8 1.2.9 UBS ............................................................................................................... 10 1.3 Libor scandal overview ......................................................................................... 10 2 METHODOLOGY .................................................................................................... 19 2.1 Models of estimation............................................................................................. 19 2.1.1 Capital asset pricing model............................................................................ 20 2.1.2 Fama–French three-factor model................................................................... 21 2.1.3 Carhart four-factor model .............................................................................. 23 2.1.4 Alternative versions of Fama-French and Carhart models for the UK .......... 25 2.1.5 Fama–French five-factor model .................................................................... 27 2.2 Event study and differences in differences ........................................................... 29 2.3 Application of valuation models in the empirical analysis ................................... 30 2.3.1 The CAPM-based approach .......................................................................... 31 2.3.2 The Fama–French-based approach ................................................................ 32 2.4 Robustness checks ................................................................................................ 34 3 EMPIRICAL RESULTS ........................................................................................... 35 3.1 Data and descriptive statistics ............................................................................... 35 3.1.1 Sample description ........................................................................................ 35 3.1.2 Databases ....................................................................................................... 36 3.1.3 Data collection and preparation process ........................................................ 37 3.1.4 Descriptive statistics ...................................................................................... 38 3.2 Results from the CAPM approach ........................................................................ 39 3.3 Results from the Fama–French approach ............................................................. 41 3.3.1 Estimating impact of the fine on each bank .................................................. 43 3.4 Robustness checks ................................................................................................ 51 i CONCLUSION ................................................................................................................... 54 REFERENCE LIST ........................................................................................................... 55 LIST OF TABLES Table 1. Panel composition of international banks involved in Libor submissions ............... 4 Table 2: Penalties for Euro denominated interest rates ........................................................ 17 Table 3: Penalties for Japanese Yen denominated interest rates .......................................... 18 Table 4: Sample banks by country ....................................................................................... 36 Table 5: Descriptive statistics .............................................................................................. 39 Table 6: CAPM based regression results with a five day event window ............................. 41 Table 7: Fama–French based regression results with a five day event window .................. 42 Table 8: Impact of fines on banks returns within a five day window .................................. 43 Table 9: CAPM based regression results with a three day event window ........................... 51 Table 10: Fama–French based regression results with a three day event window .............. 52 Table 11: Impact of fines on banks returns within a three day window .............................. 52 LIST OF FIGURES Figure 1: Reaction of Barclays’ returns to a fine and their prediction ................................. 45 Figure 2: Reaction of Citigroup's returns to a fine and their prediction ............................... 46 Figure 3: Reaction of JP Morgan Chase & Co's returns to a fine and their prediction ........ 46 Figure 4: Reaction of UBS's returns to a news about the involvement in Libor fixing ....... 47 Figure 5: Reaction of Credit Suisse Group's returns to a fine and their prediction.............. 48 Figure 6: Reaction of Royal Bank of Scotland Group's returns to a fine and their prediction ............................................................................................................. 48 Figure 7: Reaction of Lloyds Banking Group's returns to a fine and their prediction ......... 49 Figure 8: Reaction of Deutsche Bank's returns to a fine and their prediction ...................... 50 Figure 9: Reaction of Société Générale's returns to a fine and their prediction ................... 50 ii INTRODUCTION The London Interbank Offered Rate (hereinafter: Libor) is a reference interest rate at which banks are borrowing and lending money to each other. The most important banks in the world submit every workday a hypothetical expected borrowing rate at which they could obtain additional funds. The submission is private and until the Libor scandal
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