Barclays' "we weren't the only one" Libor defence
Why did Barclays choose to settle first with respect to the Libor manipulation saga, given this week's damage to its franchise, and the departure of Bob Diamond? And just how large was its interest-rate derivatives exposures?
As the blood flows from the proverbial carcass of former Barclays chief executive Bob Diamond, and political pressure claims the scalp of chief operating officer Jerry del Missier, a key focus is i) the extent to which Barclays is culpable for the Libor saga and ii) just how much markets should fear litigation and rolling heads at other institutions.
On the former, there are three key charges against Barclays. 1) Submissions to the Libor and Euribor panels were influenced by requests from Barclays interest rate derivatives traders between January 2005 and July 2008. 2) Barclays sought to influence other banks’ Euribor submissions, as charged by the US Commodity Futures Trading Commission (CFTC). And 3) The bank reduced Libor submissions during the crisis, and was guilty of operational failures between January 2005 and June 2010, according to the UK’s Financial Services Authority (FSA).
But just how powerful was the institution in the interest-rate derivatives market in order to assess its potential price-distorting impact in the market over this period?
Courtesy of Credit Suisse, this table gives you a sense of the size of European investment banks’ interest rate derivatives exposures, and expressed as a percentage of the market based on Bank for International Settlements (BIS) data.
In short, these figures put the spotlight on how Barclays boasted a strong and growing presence in this market, during the regulatory review period, while UBS and HSBC were dwarfed by RBS, Barclays and Deutsche Bank.
Barclays – along with the likes of Deutsche Bank and JPMorgan – has beefed up its full-scale global capability across products to institutional clients in recent years.
As we have reported, Bob Diamond's successor will be under pressure to deleverage its investment banking arm, in order to boost its capital base, at a time when Barclays Capital, as a top-tier institution, had been looking to solidify its status as a global flow house across the whole spectrum of rates, credit and FX, to commodities and equities.
The second cause for alarm in the markets is the extent to which the Barclays saga presages another industry-wide storm.
Barclays, as the first bank to announce a settlement, is not necessarily the most at risk from litigation, analysts say.
The bank is certainly keen to up the pressure in order to even out the pain. In a statement today (Tuesday) ahead of the Treasury Select Committee meeting on the scandal, the group charged:
"That cooperation has led to Barclays being the first to reach resolution of these issues. It is ironic that there has been such an intense focus on Barclays alone, caused by our being first to settle in the midst of an industry-wide, global investigation."
But market players are unclear why Barclays has settled ahead of its peers, with the jury out on whether this is because it was the most manipulative of the rate.
In a research note, Credit Suisse concludes:
"This is an industry issue – whilst Barclays is the first bank to announce a settlement with the FSA, CFTC and DoJ it doesn’t necessarily mean that they are the most at risk from litigation. It is unclear to us why they have settled ahead of peers, and whilst it could have negative implications, it could also be a precedent in terms of cooperation with the authorities (we note the FSA statement ‘Barclays co-operated fully .... and agreed to settle at an early stage’). Reading the statements by the authorities, we expect to get settlements by others in the course of time which could be more punitive.
...Based on these aspects we think that the banks most at risk are those which (i) experienced the most funding stress during the crisis, (ii) have the biggest interest rate derivatives books and (iii) have the weakest internal control systems. "
There seems to be no clear first-mover advantage in settling first. Indeed, in hindsight, and as the Barclays' causalities pile up, it could look like a colossal error in judgment.