The thousands of community banks have often said their much larger counterparts have trampled on them. Now some hope the latest Wall Street scandal could give them ammunition to strike back.
Big banks' alleged manipulation of interest rates has become the subject of a deepening global investigation by regulators. It has also led one small bank in Wisconsin to file a lawsuit accusing JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc and other major banks of colluding to set rates artificially low.
The Community Bank & Trust of Sheboygan -- a town on the shores of Lake Michigan about 60 miles north of Milwaukee -- is claiming manipulation of the benchmark London interbank offered rate, commonly known as Libor, has kept its interest margins artificially low.
Determined in London by the world's biggest banks, the Libor is used to set interest rates on everything from credit cards to student loans and mortgages.
Charles Tompkins of Boston law firm Shapiro Haber & Urmy filed the lawsuit in late May on behalf of the 11-branch bank, which has assets of about $554 million. It seeks class-action status so other community banks can join the litigation.
While it is unclear whether many small banks will do so, the legal action is further evidence that the scandal is reverberating well beyond the confines of Wall Street and the City of London. Big banks are already facing an array of Libor-related lawsuits by some big investors and local governments, such as the city of Baltimore.
Tompkins, whose class-action firm has handled securities, antitrust and consumer lawsuits, said U.S. community banks might have lost more than $1 billion over four years on loans to small businesses at artificially low rates.
The alleged manipulation hurt small banks that operate on thin profit margins and rely more on interest income than large banks with diverse trading operations, he said.
The lawsuit accuses the banks of violating the mob-busting U.S. Racketeer Influenced and Corrupt Organizations Act by rigging rates.
The bank defendants declined to comment. They have said in court papers seeking dismissal of other Libor lawsuits that plaintiffs have failed to show how banks acted to restrict competition, even if rates were misstated.
ALL OTHER MEANS
In its complaint, Community Bank & Trust estimated that if Libor were understated by 80 basis points in 2008, it would have lost $64,000 in interest income on its $8 million of floating rate loans. The lawsuit applies that figure to the roughly 7,000 U.S. community banks, which it defines as those with assets of $1 billion or less, to come up with an estimate of $448 million in damages for that year alone. The extrapolation makes the estimate very rough.
Documents released by the New York Federal Reserve and other regulators late last week show big banks as desperate to under-report their borrowing rates in 2007-2008 to appear stronger as the financial crisis worsened. Britain's Barclays Plc agreed late last month to pay $453 million in fines for attempting to manipulate Libor.
If the allegation of Libor manipulation by the largest banks is found to be true, small banks need to consider legal and all other means available, said Daryll Lund, president of the Community Bankers of Wisconsin.
Some community bankers, though, are on the fence over whether to join the lawsuit.
Steve Gardner, president of Pacific Premier Bank of Costa Mesa, California, said he needed to learn more about the potential impact of rate manipulation on his bank before deciding whether to sue. The bank used Libor to set rates on a substantial number of loans, including to bakeries, manufacturers and accountants, he said.
Others said only a small portion of loans were linked to the benchmark, and they did not think it had a big impact on their business.
If a few customers borrowed at slightly lower rates, it's not going to cause any heartburn, said Michael Kubacki, chief executive officer of Lake City Bank in Warsaw, Indiana.
Community Bank & Trust CEO Anthony Jovanovich seemed surprised that the law firm had named his company as the lead plaintiff, although he supported the lawsuit. He said his bank's margins were squeezed by borrowers who wanted to switch to Libor-linked loans from those tied to other benchmarks because of the low rates.
For its part, the Independent Community Bankers of America trade group will keep its members informed of developments in the scandal, but said members should consult their own lawyers to decide if they should sue, said Chief Economist Paul Merski.
The Libor investigation is just another example of the litany of scandals of the largest players that caused the financial crisis, he said. Community banks got caught in the aftershock of that.
Many community banks blame Wall Street for causing the financial crisis and the subsequent toughening of regulations that they say falls disproportionately on them.
Proving a Libor manipulation case could be difficult, though.
In a note to clients last week, Nomura analyst Glenn Schorr said it would be hard to quantify damages and to show that banks worked together to rig rates. He also said Libor set rates on very short-term loans, limiting the impact.
On Thursday, the community bank lawsuit was consolidated with three other proposed Libor class actions that accuse big banks of violating antitrust laws. U.S. District Judge Naomi Buchwald in Manhattan is overseeing the cases.
The other proposed classes would cover plaintiffs who purchased Libor-linked securities from the banks, those who traded Libor-linked securities on exchanges and those who invested in securities that paid interest based on Libor.
Legal experts expect many more proposed classes of plaintiffs to emerge.
I actually think there will be a lot of piling on here, said Duke Law School professor James Cox.
The government inquiry in the UK has unearthed a lot of information, he said. It's honey for the bears.
One of the biggest challenges to new group cases will be proving far-flung plaintiffs have enough in common to form classes -- a problem the community banks may face, he said.
Potential plaintiffs may opt to sue on their own, outside class actions. One municipality, New York's Nassau County, said last week that it might have lost as much as $13 million over five years on Libor-linked transactions and was looking to bring its own case.