Financial Industry: Why Do Banks Go Rogue: Bad Culture or Lax Regulation? - by John Casidy

If you are looking for a bit of light reading over the weekend, I can recommend a new two-hundred-and-fifty-page report about Barclays Bank, a venerable British lending institution that, during the past decade or so, has transformed itself into a hard-charging global colossus that competes with the likes of JP Morgan, Goldman Sachs, and Deutsche Bank. (As a matter of local interest, Barclays has its name on the new sports stadium a few blocks from where I live in Brooklyn.)

After narrowly surviving the financial crisis, during which it bought some remnants of Lehman Brothers, Barclays got embroiled in a series of scandals, including efforts to rig a key interest rate, the LIBOR. These scandals, combined with the firm’s generous pay structure, enraged the British public, prompted questions in Parliament, and generally saw Barclays excoriated as a festering example of all that has gone wrong with banking. Last summer, the Barclays board forced out the firm’s chief executive, Bob Diamond, a flashy American who was once a bond trader, and asked a prominent British lawyer, Anthony Salz, to conduct a review of its internal culture and practices.

While couching his conclusions in the understated prose favored by the British establishment, Salz makes no bones about what went wrong: Barclays went Wall Street. It abandoned the ancient values of sound lending and customer service, replacing them with a relentless emphasis on boosting revenues, booking short-term profits, ramping up bonuses, and putting one over on competitors. In Salz’s view, it was the adoption of this avaricious culture that led some Barclays employees to push the boundaries of acceptable behavior in areas ranging from the employment of leverage, to protecting the interests of customers, to being truthful with regulators. “Their focus on short-term return on equity and their competitive position led to a vacuum in culture and values,” Salz told the Financial Times. “Pay policies reinforced that.”

The theory that culture was the problem is an interesting one. It certainly jibes with the popular sentiment that many bankers, particularly investment bankers, are greedy hustlers, with the values of an alley cat and the self-regard of a mediaeval baron. According to Salz, many people who interviewed with Barclays reported “a sense of an entitlement culture.” Top officials at the bank earned more than a third more than their rivals at other banks, and felt they deserved it. Particularly at the investment bank, from where the LIBOR scandal and other public-relations disaster emanated, there was a pervasive win-at-all-costs attitude, which “may have led to the tendency to argue at times for the letter rather than the spirit of the law.”

Read more: Why Do Banks Go Rogue: Bad Culture or Lax Regulation? : The New Yorker

Europe Expands Investigation Into Derivatives Market

European Union antitrust regulators have expanded their investigation into whether a small network of big banks unfairly controls the derivatives market.

The inquiry, which has already ensnared major international giants like Barclays, JPMorgan Chase and Deutsche Bank, has been broadened to include the International Swaps and Derivatives Association, a trade organization for market participants.

The European Commission, which oversees antitrust regulation, had “found preliminary indications that I.S.D.A. may have been involved in a coordinated effort of investment banks to delay or prevent exchanges from entering the credit derivatives business,” European antitrust regulators said in a statement. “Such behavior, if established, would stifle competition in the internal market in breach of E.U. antitrust rules.”

Read more: Europe Expands Investigation Into Derivatives Market - NYTimes.com

Banking Industry: UK court forces Barclays to reveal staff on Libor list

A British judge forced Barclays to identify top executives alongside traders linked to a probe into rate fixing, naming ex CEOs Bob Diamond and John Varley and current Finance Director Chris Lucas on Thursday despite requests for anonymity.

The names were unveiled in a preliminary hearing for a case brought against Barclays by a residential care home operator which alleges it was mis-sold interest rate hedging products, which were based on Libor rates.

Barclays was the first bank to be punished over the Libor scandal, in which global lenders colluded to manipulate benchmark interest rates. It agreed to a fine of $453 million from U.S. and UK authorities and its then chief executive Bob Diamond left the bank following the controversy.

In the first British claim for damages, Guardian Care Homes is suing Barclays for 37 million pounds. It is seen as a test case for interest rate swaps misselling, and is also set to shine a light on people involved in the bank's manipulation of Libor and how the rate setting process was conducted.

Read more: UK court forces Barclays to reveal staff on Libor list - South Florida Sun-Sentinel.com

EU to amend law to make Libor rigging illegal

Manipulating market benchmarks in the European Union would be illegal under a draft law being proposed next week after Barclays' admission of rigging the London-based Libor rate, the EU's executive body said on Friday.

The European Commission said it would extend its draft law on tackling market abuses which is currently awaiting approval from the European Parliament and member states.

"Next Wednesday the Commission will adopt amended proposals on insider dealing and market manipulation, to include specific provisions prohibiting the manipulation of market-based benchmarks, and to make such manipulation a criminal offence," Commission spokeswoman Pia Ahrenkilde Hansen told a regular briefing in Brussels.

EU commissioners Viviane Reding, in charge of justice, and Michel Barnier, who oversees financial regulation, will present the amendments on Wednesday to impose criminal penalties on manipulation.

Note EU-Digest: better late than never...

Read more: EU to amend law to make Libor rigging illegal | Reuters

Barclays Affair Rocks European Banking Industry

In addition to Barclays, about 20 other banks are suspected of having entered incorrect figures into the LIBOR system between 2005 and 2011. In doing so, they may have inflicted losses worth billions on investors, borrowers and other customers, further destroying confidence in their industry.

Financial companies will now have to get used to stricter regulation. The British government wants to largely separate risky investment banking from the rest of the banking sector, and there are similar plans afoot in the United States. Scandals and shrinking profits have made things difficult for financial industry executives. "You can't invest in the shares of investment banks at the moment, because there's constantly so much junk coming to light," says one of the leading analysts for bank stocks.

WestLB and Deutsche Bank are among the banks investigators are targeting. In its most recent quarterly report, Germany's largest financial group states that it is being investigated by several regulatory agencies. The report notes that Deutsche Bank is cooperating with regulators, but that it has no further comment.

"If offences similar to those that apparently occurred at Barclays are uncovered at Deutsche Bank during the course of the investigations, everything will have to be investigated," says Hans-Christoph Hirt of the British shareholder advisory service Hermes. "It would be an opportunity for the new Supervisory Board Chairman Paul Achleitner to prove that he takes seriously the concerns that shareholders have clearly articulated."

Read more: Barclays Affair Rocks European Banking Industry - SPIEGEL ONLINE

EU Prepares Tougher Bank Regulation in Response to Barclays Libor Scandal

Banks in the European Union may face a fresh wave of regulation as lawmakers respond to the Libor scandal that led to the resignation of the three most senior managers at Barclays Plc. (BARC).
 
Michel Barnier, the 27-nation EU’s financial services chief, said today that he would examine whether the manipulation of the London interbank offered rate had exposed “gaps” in the bloc’s laws. At the same time, legislators in the European Parliament are seeking to bolster plans unveiled last year to toughen sanctions against market abuse.

The resignations at Barclays came after the bank was fined a record 290 million pounds (euro 265 million) by regulators in the U.S. and U.K. for attempting to rig Libor. The bank admitted that it submitted false Libor information to benefit derivatives trades and bolster its own positions.

The Barclays fine provoked renewed calls for tougher oversight of the financial system and pushed regulatory probes of interbank lending rates to the top of the political agenda. De Rynck said Barnier is “following developments” with the commission’s antitrust department, which has a related probe into Libor and Euribor rates.

Arlene McCarthy, the lawmaker leading work in the EU parliament on the draft law on market abuse, said she and Barnier discussed how the bloc’s rules should be extended to ensure that manipulation of interbank lending rates is treated as a criminal offense.

The EU needs to “give regulators the tools they were asking for to be tougher” on market abuse, she said. 

EU Prepares Tougher Bank Regulation in Response to Barclays LiborScandal - Bloomberg