Barclays and PPI + LIBOR Scandals
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Transcript of Barclays and PPI + LIBOR Scandals
Summary
What should Barclays do to regain its glory?Pramod Jindal
MBA Candidate [email protected]
001 647 773 4032
Barclays is a major global financial service provider
• Barclays is a major global financial services provider engaged in retail banking, credit cards, corporate and investment banking and wealth management with an extensive international presence.
• Listed on NYSE (BCS- ADR) and LON (BARC)• Consistently in news for LIBOR and PPI scandals
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Total Revenue $48 B
Net Income $4.6 B
Market Cap $52 B
Core Tier 1 Ratio 11%
Return on Equity 5.8%
No of Employees 141,000
No of Countries 58
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Barclays PLC’s eight business segments contributed net revenues of $48 billion in 2011
• PPI policies have been sold alongside loans to repay people's borrowings if their income fell because of illness or unemployment
• PPI profit margins 85% (higher than home or car insurance) and Banks aggressively mis-sold these expensive, inefficient and ineffective policies
• May 2011, court ruled that customers could claim compensation on PPI policies dating back many years. This was expected to allow 3 million people to make claims totalling £4.5 B, but now expected to be about £10 B
• In Oct 2012, Barclays sets aside £700 M apart from £1.3B provisioned already
• By Oct 2012, Barclays had received 19,522 claims(highest in UK) followed by Lloyd’s 9,493
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Payment Protection Insurance (PPI) Scandal
London Interbank Offered Rate (LIBOR) Scandal
• LIBOR is the rate at which banks lend to each other in London
• Used to price financial instruments worth over $350 T
• A crucial indicator of the creditworthiness and liquidity of the banks
• Managed and calculated by British Banker’s Association(BBA), a self-regulated trade union
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Average of the
remaining rates = LIBOR
Submissions arrive at an undisclosed location of Thompson
ReutersBritish
Banker’s Association
representative removes the
highs and lows (outliers)
Banks submit the inter-bank borrowing
rates
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Reported launch of
investigations by SEC, US
Dept. of Justice, CFTC
Concerns raised whether
submissions for LIBOR truly reflected
bank borrowing costs
The WSJ published that submissions for LIBOR
were significantly below than those for Credit-
default insurance
BARC agreed to $453M
settlement with CFTC, US DOJ and UK FSA
Nov 2007 May 2008 March 2011 June 2012 Dec 2012
UBS agreed to $1.5 B
settlement with CFTC, US DOJ,
UK FSA and SWISS FMSA
LIBOR Scandal: A Chronology
“I am sorry. I am disappointed and I am angry. There was absolutely no need for the behavior that was exhibited”Bob Diamond, Former Barclays CEO to UK Parliament
“Barclays has gone from heroes to zeroes”Tim Peat, Managing Director, Barclays
“Barclays falsely reported the rates and the reported rates had a pervasive pattern” Gary Gelsner, Chairman, Commodities Futures Trading Commission
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• Multiple law-suits and investigations in over 7 countries for 20+ banks
• LIBOR oversight handed to UK FSA
• Questions raised over
• Integrity, ethics of banking and capital markets
• Self regulation
• Role of regulators and Bank of England
• Aggressive culture of risk taking
• Credibility of financial system
• Bloomberg CEO Dan Doctoroff pitched to the European Parliament to develop BIOR (Bloomberg Interbank Offered Rate) that would use data from transactions such as market-based quotes for CDS transactions and corporate bonds
• YouGov Poll: 70% of the pollsters thought banks were driven by greed, while half of those questioned agreed that British banks had lower ethical standards than other major UK businesses such as manufacturers, pharmaceutical or retailers
Fallouts of LIBOR Scandal on Banking Industry
• CEO Bob Diamond and Chairman Marcus Agius forced to resign
• Fine of $453M (about 10% of annual profits)
• $4.5B of market cap erased after Barclays admitted to wrongdoings
• YouGov Poll
• Barclays brand suffered more harm than oil company BP did for the 2010 Gulf of Mexico oil spill
• 12% of Barclays customers polled were considering moving their main current account to another bank
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Fallouts of LIBOR Scandal on Barclays
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Reasons cited for scandals
Reliance on bailouts
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Or the reasons not cited?
Risk taking
mentality
Capital market= senior
management
Inheritance of a failed
(Lehman) culture
Structured to promote risk
taking
Insane performance
targets
Too big to manage
Ineffective Risk Management
Huge reliance on
capital markets
Porous Chinese
Walls
• Disappointing empirical evidence for banks– Most financial institutions caught in scandals have disappeared
(Barings Bank, Lehman Brothers, Drexel Burnham etc.)
• However, most major British banks have been engaged some sort of scandals (NatWest/Royal Bank of Scotland: serious computer glitches, HSBC: money laundering , JP Morgan: London Whale, Lloyds: employee fraud)
• There exist non-financial firms that were able to earn back the lost glory by fixing the core problem and not resorting to cosmetic changes– Maple Leaf Foods (Listeria breakout)– Dow Chemical (Bhopal gas tragedy)– Shell Oil (Brent spar)– BP (Gulf of Mexico spill)
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How can Barclays rebuild itself?
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Integrative solution to business problem
Changing hiring
strategies
Retail bankers to occupy senior
positions
Promoting risk-averse and
conservative culture
Include liabilities clause
Align employees’ goals with the
bank’s
Improve transparency,
visibility, accountability
and oversight in business lines
Capping prop trading
Payback BOE FLS funds
Effective Chinese walls
Embrace BASEL III & Dodd Frank
Capping Capital Market business
Leadership training for senior managers
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• Context: Barclays’s reputation has been tarnished by PPI and LIBOR scandals• Problem Statement: What should Barclays do to regain its glory?• Proposed solution: Barclays needs to address core business issues and not
resort to cosmetic changes• Major Insights
– Most financial institutions caught in scandals either didn’t survive or continue to suffer– Barclays is not the only British Bank facing the issue– Multiple examples of non-financial companies winning back the reputation by addressing
core problems– Barclays can stage a timely comeback through execution of the integrative solution
Summary