What the Libor Scandal Really Means

Latest allegations of malfeasance by the banking industry could be the most serious yet.


Just when the banking industry was hoping to loosen some of the postcrisis regulatory reforms and get back to business as usual, the scandal surrounding the manipulation of Libor virtually guarantees months, if not years, of fresh scrutiny and new constraints on bankers’ behavior. More than a dozen major banks, including Citigroup, HSBC Holdings and Royal Bank of Scotland Group, have been asked for information as part of an international investigation by the U.S. Department of Justice, the Commodity Futures Trading Commission and the U.K.’s Financial Services Authority. The inquiry follows the imposition of $450 million of fines on Barclays for trying to manipulate Libor, a benchmark used for trillions of dollars’ worth of loans. Those fines prompted the resignations of CEO Robert Diamond Jr. and chairman Marcus Agius, who is staying on as executive chairman until a new CEO is found.

There is no timetable for the investigation, but given that regulators were examining Barclays for two years before imposing fines in June, the scandal is likely to endure. The authorities are already sharpening their knives. Bank of England governor Mervyn King condemned Barclays’ “deceitful” practices and called for fundamental reforms to U.K. banks, including the ring fencing of retail from investment banking. The government has begun to enforce such a split, which was recommended by the Independent Commission on Banking last year. Chancellor of the Exchequer George Osborne ordered a parliamentary inquiry into standards in the banking industry as well as a separate inquiry into Libor. The European Commission will consider action of its own under the new Market Abuse Directive, said Michel Barnier, internal market commissioner. And


in the U.S. the scandal has unleashed a stream of lawsuits by municipalities, pension funds and hedge funds seeking damages for alleged rate fixing.

Julian Chillingworth, CIO at wealth management firm Rathbones, which holds shares in Barclays, HSBC and Standard Chartered, says U.K. regulators could decide to speed up ring fencing or require a complete separation of retail and investment banking. King, for one, has endorsed such a change in the past. Whatever the outcome, bank profitability is almost certain to suffer, he says. “Double-digit returns on equity will be difficult to achieve in banking,” he says. “The list of problems for the banks just rolls on and on.”

Stephen Peak, head of pan-European equities at Henderson Global Investors, which owns shares in RBS, says the scandal undermines confidence in financial markets. He says he expects “other banks to populate the rogues’ gallery in due course.”


The affair is anticipated to prompt reforms in the procedure for calculating Libor, most likely with a shift to using banks’ actual borrowing rates rather than estimates. The British Bankers’ Association, which oversees the setting of Libor, says it was “shocked” by evidence that Barclays had lowered its rate submissions, and called on authorities to consider how Libor should be set in the future.

Regulators are also facing tougher scrutiny. Paul Tucker, deputy governor of the Bank of  England, told Parliament’s Treasury Select Committee that he had not pressured Barclays to lower its Libor submissions in 2008, as Diamond had suggested earlier. Yet his admission that the Bank of England hadn’t been alerted to signs of manipulation of Libor, in what Tucker labeled a “self-certifying” market, prompted some lawmakers to demand tighter regulation. Questions about Tucker’s role in the affair could damage his chances of succeeding King as governor next year.

Barclays, meanwhile, needs to build a new culture under new leadership. Diamond and his right-hand man, Jerry del Missier, who resigned over his role in the affair, had worked together closely for 16 years. After Barclays sold its BZW equities and advisory arm to Credit Suisse in 1997, it took a rump fixed-income business and built it over a decade into a global powerhouse, enabling Barclays to buy the U.S. operations of Lehman Brothers in 2008. The bank’s next phase is certain to be less expansionary. The leading internal CEO candidate is Antony Jenkins, the 50-year-old head of retail and business banking, who has spent most of his career at Barclays. He lacks investment banking experience, which many believe is vital for a bank that derives more than half its profits from that business. Then again, in the wake of the Libor scandal, an executive untainted by investment banking activities may be just what Barclays needs.