Barclays and LIBOR Scandal Case Solution

2. Leadership at Barclays

Being a very old and established bank in Europe, Barclay’s leadership had been focused on following the tradition and strengthening the retail and commercial bank status of the company. By 2011, the bank had grown to a universal status engaged in retail, commercial lending, credit cards, investment banking, wealth management and investment management services. Robert Diamond joined Barclays in 1996. Prior to that he had been working for Credit Suisse First Boston but due to a disagreement over his bonus he quit that job and came to work at Barclays. At that time, he was treated well, and he became head of BarCap’s Global Markets division. A year later, Diamond became head of BarCap and led the investment bank to post strong growth and profitability over the years. Although the company was growing under the leadership of Diamond, several others did not feel comfortable with the amount of compensation he was drawing from the bank. When in 2010, it was announced that Diamond will take over as CEO of the bank; experts felt that he had a lack of experience in retail banking and did not deserve this position. When the LIBOR scandal erupted and after his ouster in 2012, former Barclays CEO blamed Diamond for manipulating and violating internal guidelines that led to huge trading losses for the company. This tells the reader that Barclays was behind its leader as long as the benefits were trickling in but when the problems began to appear the company found its loyalties shaken.

3. Leadership of LIBOR

LIBOR was a rate that represented cost of unsecured funding in the open market for the largest financial firms. The central banks including Bank of England, US Federal Reserve, and the European Central Bank were prime regulators of the official lending rates, but LIBOR was designed to facilitate interbank lending between large banks. The British Bankers Association took over the process of managing, defining and setting LIBOR from the year 1986. Prior to this, the rate was set as per guidelines established by Minos Zombanakis in 1969. He was a former banker at Manufacturers Hanover. Between 1969 and 1986 the rate was set in a similar manner until the leadership of LIBOR passed on to the British Bankers Association. This association was considered ‘club of gentlemen’ bankers.

4. Setting the LIBOR

The rate was set based on the judgment of management. In the initial stage, the rate was set by Minos Zombanakis in 1969 using a simple average concept. He used cost of money relevant to different banks and took an average of them. This was called London interbank offer rate, and this method was then followed for the next fifteen years. The British Bankers Association took over management of the LIBOR from 1986. The association described LIBOR as the rate at which banks could borrow money from each other. The LIBOR was calculated for different currencies, and there were different panels of banks that contributed submissions for each currency. An electronic spreadsheet recorded all these submissions. The spreadsheet program was provided by Thomson Reuters, who then created a LIBOR rate for each maturity using the trimmed mean structure provided by the association. This rate along with each submission was then distributed to the press by the company. The process of setting the LIBOR was blamed because it opened itself to manipulation. Allegations were placed on banks that they had purposely provided low rates in the submissions. This meant the LIBOR did not provide an accurate picture. The banks were not using the true cost of borrowing while submitting these rates. This process opened the calculation of LIBOR to manipulation as banks were not being checked when they submitted the bids.

5. Structure of Barclays 

The structure of Barclays was divided based on the functions of different departments. The retail bank carried out its functions with the help of branches while the investment banking business focused on debt trading and underwriting. Barclays eventually bought Lehman Brother’s business giving its investment bank sufficient mergers and acquisition capabilities. Barclay’s retail system was the top-ranked UK based bank in terms of deposits. The investment banking division of BarCap had a Money Market Desk. The Desk was located on the same trading floor as the derivative traders. The cost of borrowing was determined by this desk, and it was responsible for submitting the rates to Thomson. This closeness between the Money Market Desk and the derivatives dealer was not ideal for the situation. On several occasions, the derivates dealer asked the Desk to adjust its LIBOR submissions by a few basis points. This violation continued to occur. Barclays’ swaps traders also facilitated the desire of former Barclay’s swaps traders to alter LIBOR submissions by passing along the former traders’ requests to the Money Market Desk as if they were their own.

6. Structure of Financial Markets

The Financial Services Authority was the primary regulator for banks and other financial firms in the UK. It was an independent body accountable to UK Treasury and Parliament. The authority had been given several powers based on statutory objectives of market confidence, financial stability, consumer protection, and reduction of financial crime. There were several issues prevalent at the authority, and the financial crisis of 2007 revealed these flaws. Eventually, the Parliament introduced sweeping changes in the authority’s powers. The Prudential Regulation Authority became part of Bank of England and by 2013; the Financial Conduct Authority replaced Financial Services Authority. Bank of England was the UK’s central bank, and it provided monetary and financial stability. At the time of the financial crisis, Northern Rock, and Barclays had to ask for liquidity support from the Bank of England. Using this emergency line support raised concerns about Barclay’s liquidity and viability. Besides these two, Commodity Futures Trading Commission also regulated the futures and options market for banks. The Financial Services Authority also found that Barclays manipulated its rate submissions by ignoring several Business Principles of the authority. Even though, the company later collaborated with the authority in solving the crisis the problem would not have risen if they had conducted business with due care and diligence.

7. Players within Barclays

Barclays had a group of talented individuals in its management including Diamond himself. Besides him, there were other players that were influential in the execution of this scandal. Both the derivative dealers and the workers at the Money Market Desk were considered responsible for the scandal. The derivative dealers were responsible for several instances of manipulating the LIBOR for specific maturities whenever they wanted specific transactions to give them gain or loss. Even former Barclay’s swaps traders who were now working in other banks passed on requests to employees at Barclays for submitting the LIBOR rates. Del Missier and Tucker also played their parts in the process. The management at Barclays also should be blamed as they could not identify these instances at the right time. Even when this issue was raised by the compliance department, the group ignored these developments. Even though, it was inappropriate for the Money Market Desk to consider requests from derivative dealers in determining what rates to submit but the senior management either ignored or stayed unaware of these manipulations. The compliance function also proved ineffective as it did not discuss these violations with the people responsible for submitting the rates. In addition, no policies or procedures were developed to handle these conflicts.