AFP / Getty Images European Union Competition Commissioner Joaquin Almunia

The European Union has fined eight banks, including behemoths like Deutsche Bank and Royal Bank of Scotland, a total of 1.7 billion euros ($2.3 billion) for their part in an interest rate rigging scandal that rocked the financial world last year.

The LIBOR, which stands for the London Interbank Offered Rate, refers to a set of interest rates banks that pay each other to borrow money for very short periods of time. It is a so-called “benchmark” rate from which trillions of dollars in common financial instruments like high yield debt or students loans are priced, and banker are accused of manipulating the rate for years. The penalty announced Wednesday in Europe is just the latest in a series of regulatory actions which have now cost big banks more than $5 trillion in penalties.

The infractions took place between 2005 and 2008, according to European authorities, though some lawsuits currently in litigation allege that LIBOR rigging continued as late as 2011. Banks are accused of intentionally submitting lower interest rates than they actually were paying in order to appear more financial sound during the crisis, and fixing rates up and down in order to profit from derivatives trades through advanced knowledge of where the LIBOR rate would land.

The investment bank Keefe Buyette and Woods estimates that when private litigation is included, the scandal could cost banks as much as $35 billion. That’s a large chunk of change, but banks this big can afford to pay. As Yves Smith of Naked Capitalism has argued, the most important thing for regulators to do is severely punish the individual traders responsible for the misconduct. She estimates that the misdeeds could have netted “an average of $2.9 to $3.6 million in extra bonuses” for each individual responsible. With that kind of financial incentive to skirt the rules, only severe criminal penalties will dissuade future misconduct.

That next shoe may be dropping soon: Reuters reported last week that criminal charges in the U.S. and Europe are imminent.

[FT]