Barclays – another banking corporate governance scandal

Banking giant Barclays Capital has been shaken this past week by allegations that it manipulated Libor, a key benchmark for interest rates worldwide, for its own benefit. CEO Bob Diamond has resigned, while other banks appear to have been involved as well. But just what exactly is Libor, and to what extent can Barclay’s actions be construed as a corporate governance failure?

Libor is short for the London Interbank Offered Rate, a measure of the cost of borrowing between banks and a global benchmark for interest rates. In practice, it is a collection of rates generated for 10 currencies across 15 time horizons, ranging from one day to one year. Libor rates are set each business day through a process overseen by the British Bankers’ Association. Between seven and 18 large banks are asked what interest rate they would have to pay to borrow money for a certain period of time and in a certain currency. The responses are collected by Thomson Reuters, which removes a certain percentage of the highest and lowest figures before calculating the averages and creating the Libor quotes.

Libor is effectively the world’s most significant benchmark for interest rates. Roughly $10 trillion in loans — including credit card rates, car loans, student loans and adjustable-rate mortgages — as well as some $350 trillion in derivatives are tied to Libor. If Libor goes up, your monthly interest rate payments may go up with it. If it goes down, some borrowers will enjoy lower interest rates, but mutual funds and pensions with investments in Libor-based securities will earn less in interest.

Last week, U.K.-based investment bank Barclays Capital (BCS) paid $453 million in a settlement with U.S. and U.K. regulators, admitting that it lied in its Libor submissions about its cost of borrowing. Between 2005 and 2008, Barclays traders repeatedly requested that colleagues in charge of the Libor process tailor the bank’s submissions to benefit their trading positions. Barclay’s staffers also colluded with counterparts from other banks to manipulate rates, according to the settlement. The logic is similar to that of an insider trade in the stock market — if you have advance knowledge of information that will affect a security, you can make trades to profit from it.

In addition, between late 2007 and early 2009, Barclays made artificially low Libor submissions. This was during the height of the financial crisis, and the bank was afraid that if its submissions were too high, it would get punished in the markets as investors questioned its health. It’s not just Barclays, however — suspicion has now fallen on all the banks that participate in the Libor process.

The lack of specific internal controls, particularly in reviewing email communications, was one of the failures cited by a Commodity Futures Trading Commission regulatory order implementing its share of the Barclays settlement. The CFTC said Barclays lacked daily supervision and periodic reviews that could have detected the interest rate manipulation. “Appropriate daily supervision of the desk by the supervisors, as well as periodic review of the communications, should have discovered the conduct. However, Barclays lacked specific internal controls and procedures that would have enabled Barclays’ management or compliance to discover this conduct,” the CFTC order said.
Internal control is one of the principal means by which risk is managed. The Board should set appropriate policies on internal control and regularly assure itself that appropriate processes are functioning effectively to monitor the risks to which the company is exposed and that the system of internal control is effective in reducing those risks to an acceptable level. It is essential that the right tone is set at the top of the company – the Board should send out a clear message that control responsibilities must be taken seriously.

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2 Responses to “Barclays – another banking corporate governance scandal

  • If you look at Diamond’s actions in 1998 it shows his lack of respect for those internal controls. He invested far more in Russia then was allowed by those internal controls (he had asked the board to increase by 5 fold the investment, they cut it down to 2.5 fold, and he overshot that anyways), and within months they defaulted.
    This whole thing reeks of a cultural sense of superiority and maintaining that facade within the investment industry. How can we (governments spurred on by the will of the people) change that culture and bring investment banks back into a realm of accountability for the people whose money they are dealing with?

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