Barclays Penalized for LIBOR Probe

Barclays PLC (BCS - Snapshot Report) has been levied a penalty of $450 million for rigging the London Interbank Offered Rate (LIBOR) during 2005-2009. The agencies involved in the probe include the U.S. Securities and Exchange Commission (SEC), the U.S. Department of Justice (DoJ), the Commodity Futures Trading Commission (CFTC), the UK Financial Services Authority and the Japanese Financial Supervisory Agency.

According to these regulatory authorities, big banks such as Barclays,JPMorgan Chase & Co. (JPM - Analyst Report),HSBC Holdings plc(HBC - Analyst Report), Citigroup, Inc. (C - Analyst Report) and Bank of America Corporation (BAC - Analyst Report) manipulated interest benchmarks like LIBOR and EURIBOR for financial gains. LIBOR is the rate at which banks lend to each other.This rate is used as a reference rate for financial products all over the world.

The British Bankers’ Association (BBA) sets LIBOR on a daily basis for short-term borrowing in 10 currencies. Banks quote rates at which it will be feasible for these to borrow. The four highest and lowest reported rates are removed and the remaining rates areaveraged to set the LIBOR rate.

Now, Barclays has been charged of presenting wrong LIBOR rates to favor its interest rate derivative traders, who sought to benefit from bank’s favorable trading position. This was done by demolishing the so-called information sharing restrictive barrier between its treasury departments, entrusted with rate sets and the trading units.

Moreover, Barclays submitted dubious EURIBOR rates in order to influence rate settings by other banks. At the peak of the economic crisis, the company resorted to reporting fake rates to avoid potential media backlash. Such malpractices have put around $350 trillion worth of financial products including complex derivatives, student loans, credit cards and mortgages at stake. In addition, consumers have been subject to paying inappropriate interest on their loans.

Regulatory authorities have come down hard on such unwarranted activities of the bank. Barclays will pay a record $200 million fine to CFTC. The company will further shell out $160 million and $92.8 million in penalties to the DoJ and UK Financial Services Authority, respectively.

The regulatory bodies are looking into the affairs of other large banks that have already received subpoenas from these regulatory authorities. Regulatory bodies aim at a thorough investigation followed by an apt judgment, in order to bring the wrongdoers to justice and mitigate the occurrences of such incidences in the future.

Conclusion

Barclays should be praised for standing up and taking responsibility for its misconduct by providing extensive cooperation in the probe. Though the bank has to pay a hefty fine, the amount remains comparatively lesser than the profits it has made over the period by manipulating interest rates. The company’s actions have put the integrity of a widely used benchmark interest rate in danger and left the other market participants in a mess.

Barclays’ credentials will suffer immensely because of its self-indulgent acts. Though the senior management has decided to forgo its bonus for the year, we see this measure as too little too late.

Currently, Barclays retains a Zacks #3 Rank, which translates into a short-term Hold rating.