To Sir David Walker, Chairman of Barclays Plc.
Date 24th February 2013
Subject Implication of The Recent Libor-Fixing Scandal for Barclays Bank
1. Executive Summary
* The London Interbank Offered Rate (Libor) is the average interest rate charged to banks for lending funds in the interbank market (Investopedia n.d.). * The UK Treasury reported that Libor is responsible for an estimated $300 trillion worth of financial transaction (BBC 2012). * Barclays’ traders submitted inappropriate rates upon derivative traders request (FSA 2012). * Barclays’ submitted inappropriate rates to prevent negative media attention (FSA 2012). * Barclays was fined £290 million for Libor scandal (Wilson 2012). * Former Chairman, CEO and COO resigned in July 2012 (BBC (B) 2013). * Barclays’ share prices fluctuated due to Libor Scandal (Fletcher 2012). * Pursuing profit maximization, Barclays inevitably exploited its stakeholders (MBA Knowledge Base n.d.). * Financial managers think solely for the purpose of profit maximization for the shareholders as it lose focus, carrying out unethical behaviors to gain short-term gratification. * Barclays is suggested to create shareholder value by combining a well-thought-of goal with focused financial planning that will deliver returns to shareholders but in an ethical manner that is acceptable by the society (Barclays Boss Lays Out Revival Plans, 2013). * Installation of more advanced surveillance devices further enforces plan as employees are monitored closely in efforts to control the wellbeing of the workers (Roland 2013). * Barclays is suggested to form a neutral ring-fenced rate-setting unit to monitor the rates submission (Daniels 2013).
2. Libor: Explained
The London Interbank Offered Rate (Libor) is the average interest rate charged to banks for lending funds in the interbank market (Investopedia n.d.). Major banks in London who are under BBA submit the rate they presume they will have to pay for borrowing funds from another bank to Thomson Reuters, who will then discard the four lowest and highest rates and use the remainders to calculate the average, resulting with the Libor rate (Kiff 2012). The importance of Libor
It is used as the benchmark for interest rates around the world (Surowiecki 2012). The UK Treasury reported that Libor is responsible for an estimated $300 trillion worth of financial transaction (BBC 2012) such as mortgages, corporate loans and derivatives (Surowiecki 2012). Also, Libor acts as a barometer for the welfare of the volatile global financial market (BBA n.d.).
3. Barclays’ mistakes
Employees at Barclays submitted lower than actual predicted rates to Thomson Reuters (Murray-West 2012). Why it was done
Derivative transactions made use of the Libor rate. Hence, the fluctuation of the rates would influence the profit gained for the traders (Surowiecki 2012). Both the traders and rate submitters cooperated through frequent interaction (Surowiecki 2012) as traders requested for lower rates because they would benefit by paying less for the interest charged on the derivatives. Barclays submitted lower rates to conceal the trouble state it faced during the 2008 credit crunch (Murray-West 2012) when initially their submitted rates were higher than other banks (Bischoff & McGagh 2013). Lower rates prove that banks intending to lend funds to Barclays were assertive of their financial health, because the less assurance a bank had for another, the higher the rate charges will be (Bischoff & McGagh 2013), and Barclays expressed the contrary to conceal their financial instability. It was said that Bob Diamond, then chief executive officer of Barclays, was contacted by Paul Tucker, the deputy governor of the bank, concerning the recurrent greater rates amongst other banks, which worried Diamond who conveyed the news to Jerry del Missier, then chief operating officer, who misinterpreted...