Libor Scandal: Barclay Bank
Libor Scandal: Barclay Bank
The financial industry is not new to scandals. Barclays bank, probably one of the oldest banks in the world has also not escaped from this quagmire. Barclays bank was involved in the Libor scandal that affected major banks in the world such as UBS, Royal Bank of Scotland, Rabobank, as well as Barclays. This scandal occurred from 2003 till 2012, when it was discovered by financial regulators.
Background of the Bank
Barclays bank is a leading financial institution that offers banking and other financial services. Its headquarters are located in London, UK. It is from its headquarters that it manages its network of branches, which are located in Europe, Africa, America, and Asia. The bank’s main activities are wholesale, investment, corporate, and retail banking. It also offers other banking services such as selling and buying currencies, financial advisory, wealth management, and transfer of funds.
Overview of the Scandal
The main accounting problem at Barclays was manipulation of the Libor rate (London Interbank Offered Rate). The Libor rate is a benchmark rate that is derived from the rates that banks offer unsecured credit to fellow banks in the London interbank market. This rate is calculated using data from a panel of global banks that submit their rates to Thomson Reuters data collection service every morning before 11:00 am. This data is simply calculated using the average of the rate that lies between 25% and 75% of the issued representative data. Noteworthy, this rate is calculated for the dollar, the euro, British pound, the Japanese yen, and the Swiss franc. Further, maturity rates that are considered start from overnight lending to one year (McBride, 2016).
The manipulation of the Libor rate has a wide effect on the financial market. To begin with, this rate directly affects the interest rate to other loans and forms of credit. In general, these include personal, corporate, investment, student, and auto loans. It also affects home loans and mortgages. Further, the changes in the Libor rate provides speculators, who may include economists, traders and brokers in financial assets, and bankers with insight on economic performance in the market (McBride, 2016).
Barclays bank and 15 other financial institutions used to collude in order to manipulate the Libor rate. Barclays on its part manipulated this rate from 2005 to 2007 so that its traders and brokers could make profits from derivatives that had been pegged to the LIBOR base rate. In addition, it purposefully used to borrow money during the financial crisis period, 2007-2008, at low prices so that it would appear less risky and stable. Simple the company violated principle 2, 3, and 5 of the FSA Principles for Business, which are the principle of skill, care and diligence, the principle of management and control, and the principle of market conduct respectively (FCA, 2014).
Correction of the Problem
Once the Libor scandal was discovered, Barclays moved to swiftly fire some of its employees who had been linked to the offenses. In addition, the company immediately stopped manipulating the Libor rate, by ensuring that it borrowed credit at the competitive market rate. It also stopped colluding with other bankers in the setting of the Libor rate.
Notably, Barclays fired some of its employees who were involved in the scandal. Key among them was the company’s CEO Bob Diamond. Since Barclays Bank was the first to reveal this scandal in the European Union it was not fined for the offense. However, it still had to pay penalties relating to the settlement with the bank’s watchdog. Nonetheless, other participating banks such as Citigroup were fined. For example, Citigroup paid a fine for $425 million, the Dutch Rabobank paid $1 billion and RBS, Deutsche Bank, and Societe Generale all paid over $2 billion in fine. In 2015, the FCA ordered Barclays to pay 284.4 million pounds to settle ist case with UK and US regulators (McBride, 2016).
The scandal tainted the image of Barclays Bank since it made most investors to lose their hard-earned incomes due to the unscrupulous behaviors of the bank’s employees. In light of this, the company will have to build trust with its stakeholders by encouraging transparency on its activities. By participating in the disclosure of this scheme, and pleading guilty, Barclays has started to build trust among regulators and investors. Moreover, the company has also fired its CEO and employees who were linked with these offenses in order to build confidence among employees. Notwithstanding the fines, Barclays has continued to perform strongly. In fact, even after the scandal was discovered, the company’s value rose by 3%, adding a total of 1.48 billion pounds to its value (Titcomb, 2015).
The financial sector is prone to scandals, which have a huge detrimental effect on investors and customers of these institutions. Therefore, financial regulators must constantly formulate stringent policies to ensure that financial institutions do not breach financial guidelines. In addition, governments must ensure that institutions that are mandated to act as watchdogs for companies in the financial sector are independent. Further, banks must constantly monitor their employees to ensure that they do not engage in illegal activities that may jeopardize its performance and credibility.
Financial Conduct Authority (FCA). (2014). Prin 2.1: The Principles. Retrieved from https://www.handbook.fca.org.uk/handbook/PRIN/2/1.html
McBride, J. (2016). Understanding the Libor scandal. Retrieved from http://www.cfr.org/united-kingdom/understanding-libor-scandal/p28729
Titcomb, J. (2015). “Barclays handed biggest bank fine in UK history over ‘brazen’ currency rigging.” The Telegraph. Retrieved from http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11619188/Barclays-handed-biggest-bank-fine-in-UK-history-over-brazen-currency-rigging.html