Libor Scandal: JBIC move highlights Libor damage at Barclays

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By:
Duncan Kerr
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Scandal to test client loyalty; reputational and counterparty risks acute.

One of the worst consequences for any bank engulfed in a severe scandal is the potential damage to its reputation – and the risk this then feeds through to the business it does with clients.

For Barclays, which is reeling from the Libor scandal and the "devastating blow" that outgoing chairman Marcus Agius said it had done to the bank’s reputation, this risk looks uncomfortably real.

Japan Bank for International Cooperation (JBIC), a policy financing institution owned by the Japanese government, last month dropped Barclays from lead underwriting a global dollar bond issue it was originally awarded in May alongside Bank of America Merrill Lynch and HSBC.

Outgoing Barclays chairman Marcus Agius
Outgoing Barclays chairman Marcus Agius
The precise reason why Barclays was dropped has not been publicly disclosed by JBIC or Barclays, but the rarity of any bank, not least a leading bond underwriter, being dropped in this way suggests JBIC was ultimately uncomfortable enough to act.


JBIC declined to comment.

The question this has raised for Barclays, its bond business and perhaps its broader client-related investment banking franchise is whether this is a solitary issue related to JBIC or might be followed by similar moves from other clients.

A head of debt capital markets at a rival investment bank says: "It’s far too early to draw any material conclusions from anything that has happened, and particularly about the business of one bank when there are so many other banks caught up in this. Clients are, of course, sensitive to such matters but they are also rational and more often than not loyal. That loyalty can be tested though."

Another senior capital markets banker at a different rival bank adds: "So long as Barclays can show they are tackling the issue, improving governance, making a good stab at changing the culture, then clients will stand by them."

Barclays has declined to comment on the JBIC affair but says that during the same week, before and after news on JBIC emerged, the bank lead managed some of the biggest bonds in the global capital markets, not least for Japanese blue-chip clients Sumitomo Mitsui Banking Corporation and Nippon Telegraph and Telephone Corporation.

Indeed, Barclays has continued to print new business since. The following week (July 16), the bank sold bonds for Sri Lanka, state-owned Czech Railways and Kexim, the state-owned export-import bank of Korea. It is also marketing bonds for South African miner AngloGold Ashanti, state-backed Sri Lankan leasing company People’s Leasing and State Bank of India, the policy financing institution of the Indian government.

Scandals severe enough to force the resignations of the chairman, chief executive and chief operating officer of one of the world’s biggest banks will always be unilaterally condemned. But in Japan, and particularly among government institutions, there is an acute sensitivity to scandal.

Nomura, for example, is suffering the consequences of being caught up in an insider-trading scandal in Japan. The bank was dropped last month as a lead underwriter on Japan Housing Finance Agency’s 30-year bond issue, and similarly dumped as a lead underwriter on a bond issue for Development Bank of Japan and a share sale for Japan Tobacco. Nomura declined to comment.

However, outside of Japan, government and public sector institutions will also be keenly aware of the potential reputational and counterparty risks related to working with a scandal-hit bank, and might, in turn, decide to take action.

Citi, for example, took a knock in the immediate aftermath of the so-called Dr Evil trade in 2004, when the bank authorized traders in London to sell €12.8 billion of government securities, only to profit by buying some back swiftly at lower prices. The trade caused uproar, provoking some European governments to temporarily shun Citi as a bond underwriter and adviser on asset sales.

Although the scandal surrounding Barclays is different, its public-sector issuer clients are likely to be sensitive to reputational and counterparty risk issues, not least because of their political links.

Last year, Barclays was the leading arranger of sovereign, supranational and agency bonds globally, with a 7.7% market share from arranging $161 billion of bonds, according to Dealogic.

Euromoney contacted several of the biggest European public-sector bond issuers, many of which Barclays regularly works for, and while all declined to comment on whether the Libor scandal would alter their relationship with the bank, there is some concern.

One head of funding at a European supranational says that many borrowers similar to it are waiting to see what the legal implications are, although he trusts Barclays has "cleaned up the mess".

Another head of funding at a different European supranational says as there are so many scandals emerging, including the money-laundering affair engulfing HSBC, if he were to comment on one he would "never stop".

JBIC’s decision to drop the bank from its bond issue does look like an isolated issue, given the number of bond mandates Barclays has executed for government and private-sector clients since the Libor scandal emerged. Time will tell to what extent.

For now, Barclays does seem to have the support and backing of clients all over the world.