Barclays and the LIBOR Scandal Harvard Case Solution & Analysis


London Interbank Offered Rate, or LIBOR has been introduced to represent the cost or charges of unsecured funding in the open market for the largest financial institutions. However, the main central banks such as the European Central Bank, the Bank of England and the U.S. Federal Reserves would periodically fix official lending rates or sometimes called base rate.

LIBOR is used to set a defined rate of interest at which one bank borrowed money from another bank every day. Precisely, this rate was then used as the basis to set the interest rate charges to customers. Different services like credit cards, consumer and commercial lending products and student loans do use LIBOR as a base rate.

On the other hand, derivatives traded over OTC market and exchanges all around the globe were settled on the basis of LIBOR. LIBOR is the crucial indicator which judges the creditworthiness and the liquidity of the bank. The concept of LIBOR was first introduced by the Minos Zombanakis, a former banker.

Now it has been organized by the British Banker Association (BBA), it has over 200 bank members, who addresses the issues over LIBOR. Barclays PLC was of the largest bank in the world and sixth largest in Europe on the basis of total assets.

Barclays was one of those 16 banks around the globe, who submits their respective rates to the Thomson Reuters (Thomson), that manages the rates submitted and then created LIBOR rate by using the technique of trimmed mean.

Problem Diagnosis

It was September 2007, when an article was published claiming that the LIBOR rate is fictitious. It was a complaint from one of the treasurer of one of the largest banks of the world. After some other concerns, and publication of the articles, the media and bankers were stunned to know that there are potential weaknesses in the LIBOR setting process.

The trade of future contracts was often used to trade derivatives to hedge Over The Counter (OTC) derivatives positions, which was based on the LIBOR based exchange, in a such a way that any change in the LIBOR rate on the day when the LIBOR based future contracts were settled could also affect the profitability of a trader’s position.

After the occurrence of that incident, the regulatory bodies started the investigation and found that from 2005 to 2009, derivative traders in the United States and the United Kingdom, approached to the Desk, in order to submit a specific rate or adjust its already submitted rates. The traders argued that there is a difference in the rates provided by the bank and the rates in which the banks were actually trading.

After the investigations, the newly appointed CEO, Mr. Robert Diamond was found guilty of doing this fraudulent activity to deceive the financial market over its performance. But he refused to accept any charges against him, rather than he put his blame over his some employees for the violation of laws and regulations related to derivative trading related LIBOR rate.

In 2011, Barclays was considered as the universal bank following the news that it has observed the total income of £32.3 billion and a net profit of £4.0 billion. The retail system of the Barclays bank was rated as the number 1 U.K. based bank in the U.K. market on the basis of deposits and an independent analysis.

In 2008, following the bankruptcy of the Lehman Brothers, the management has decided to reenter in the merger and acquisitions, in order to add more capacities and capabilities in its leading fixed income business. Even after that, since, Barclays being a well-known and one of the largest banks in the world, who was also responsible for the submitting its rates was found guilty of making false statements in the process of rates submission.

Following the financial crisis of 2008, the management of the Barclays bank falsely manipulated the process of the submission of rates from 2005 to 2009 and it has done low balling LIBOR from 2007 to 2009 for the sake of making millions of profits and/or reducing the costs. Barclays was supposed to submit actual interest rate they are paying in inter-bank transactions................................

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