ANZ bank and Australia's corporate watchdog are about to embark on a battle that will end badly for one side or the other and possibly both.

On Friday afternoon, the Australian Securities and Investments Commission (Asic) dropped a bombshell by announcing it will take ANZ to court for allegedly manipulating a key interest rate, known as the Bank Bill Swap Rate.

ANZ has rejected the allegations and says it will "vigorously" defend legal action.

The Bank Bill Swap Rate or BBSW is hugely important. It is a key benchmark interest rate that is used to calculate the repayments on billions of dollars in loans, including mortgages, credit cards and business loans. It is also used to set the interest rate on hundreds of billions of dollars of securities, such as bank bills (like short-term bonds) and other financial instruments.

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Asic is alleging ANZ "traded in a manner intended to create an artificial price for bank bills on 44 separate days" between March 2010 and May 2012.

At the time, the BBSW in Australia was set by a panel of 14 banks - the Big Four and 10 investment banks. The 14 banks would submit the rates at which they traded bank bills during a five-minute trading window used to set the rates.

Asic is alleging ANZ used its market size to influence the price (or interest rate) of the bank bills during that key five minutes.

The various arms of the bank which hold and deal in bank bills are alleged to have colluded to influence the market prices.

ANZ is alleged to have stockpiled bank bills to sell during the five-minute window. This would have the effect of pushing bank bill prices down and interest rates up. Bond prices and interest rates move in the opposite directions - when bond prices fall, interest rates rise. Big banks typically hold and issue many billions of dollars' worth of short-term securities and derivatives and can have either a "long position" where they would profit if prices rose, or a "short position" where they profit if prices fall.

A movement of a few hundredths of a percentage points in the right direction can mean several million dollars in profit for a bank and its traders.

Asic claims ANZ's behaviour is likely to have caused "financial detriment" to customers with the opposite exposure to the BBSW, or products that were referenced to BBSW, such as loans.

For its part, ANZ argues Asic's case is "based on a misunderstanding of how bank bill issuance and interest rate risk management operates" and that it operated in a consistent way with market practices.

ANZ chief risk officer Nigel Williams said on Friday the bank had cooperated fully with Asic's investigation "over many months, at a cost of many millions of dollars".

"It is now for the courts to provide clarity on trading practices," Williams said.

ANZ is far from the first bank around the world to come to the attention of regulators in the past few years. It is estimated that banks in the northern hemisphere have paid about US$235 billion ($344 billion) in fines since 2008. These covered a range of matters including toxic sub-prime mortgages, UK conduct breaches, sanctions, foreign exchange and rigging of interest rates.

Globally, banks often settle with regulators and pay fines to deal with problems. ANZ, which denies any wrongdoing, has decided to fight in this case.

What's certain is that we are set for a mammoth legal battle.

Asic chairman Greg Medcraft has said the agency has an A$80 million legal war chest to fight the court action.

The stakes are high. Asic already has a reputation as a toothless tiger of a regulator and one that regularly misjudges and loses court actions. A loss in this case would be a huge dent in its credibility and severely curtail its ability to pursue other alleged corporate wrongdoers.

For ANZ, there's the reputational damage.

Even if the broader public don't fully understand the BBSW, the allegations that will be aired daily in court will ensure they're constantly aware ANZ is facing such accusations.

Then there's the cost.

ANZ is sure to spend tens if not hundreds of millions fighting this case and it will present a huge distraction for management, right up to its Te Atatu-born chief executive Shayne Elliott.

Should ANZ lose the case, it may face fines in the tens of millions of dollars.

But that is small beer when we consider that if a court rules that it did indeed manipulate interest rates, it opens the way to legal action from anyone who thinks they were charged too much interest as a result.

Given the BBSW was used to set interest rates not just on loans issued by ANZ but by the other Big Four banks as well, the pool of potential litigants is huge.

Class action lawyers love taking on the banks and they are sure to be salivating at the prospect of another possible avenue of attack.

ANZ is taking a huge risk by opting for a public and protracted court battle. They must be confident they will win.