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California community banks could join in litigation case

Many smaller community banks have been accusing larger financial institutions of walking all over them, especially over the past few years. Some of them appear to be using the latest Wall Street scandal as an opportunity to level the playing field between community banks and larger chains. One of the big sticking points between the two groups has been allegations that the larger banks have manipulated interest rates to an artificially set low. Now, at least one community bank is striking back against several larger banks in a business litigation suit. California bankers may want to keep an eye on this case as it unfolds.

The community bank in question recently filed a lawsuit against J.P. Morgan Chase and Company, Bank of America Corp., Citigroup Inc. and other major banks. It accuses them of engaging in collusion to set those artificially low rates. The community bank claims that larger banks manipulated the benchmark London interbank offered rate, also known as Libor. The Libor is reportedly decided in London by the world’s biggest banks. It has a far-reaching impact on the world, since it is used to set interest rates for consumer debt — including things like credit cards, student loans and home mortgages.

The lawsuit was filed by the Community Bank and Trust of Sheboygan in Wisconsin. It seeks class action status, which would allow other like-minded community banks to join in the lawsuit. The alleged manipulation in the case at hand reportedly causes financial harm to small banks because they operate on narrow profit margins and depend more heavily on interest income, as opposed to large banks that enjoy diversified trading operations.

While many community banks seem to point the finger at Wall Street for instigating the current financial crisis, proving that big banks manipulated the Libor could prove difficult. One analyst claims that it would be hard to not only quantify damages from such a manipulation, but to prove that banks acted together to manipulate such rates to begin with. Still, California community banks that believe allegedly low Libor rates have harmed their business may want to consider joining in if this business litigation case is granted class-action status.

Source: Business Insider, “Thousands Of Small Banks Could Sue Wall Street Giants Over LIBOR,” Tom Hals, July 16, 2012