THE GAME of musical chairs played by key figures at Barclays has done little to inspire public or investor confidence, and much to weaken the City of London’s standing as the world’s biggest financial centre and to damage its reputation for integrity. On Monday, the bank’s chairman, Marcus Agius, resigned in response to the financial scandal at Barclays. This involved the manipulation of key interest rates for the bank’s benefit, for which it was fined £290 million (€362 million). The buck stopped with him, or so the chairman initially declared.
Yesterday, Mr Agius unexpectedly returned as chairman, and chief executive Bob Diamond quit, succumbing to “external pressure”. Twenty-four hours earlier he had vowed to stay at his post and defend the bank’s reputation. Mr Diamond’s rapid change of mind followed mounting public criticism and increased political pressure on him to step aside, with prime minister David Cameron announcing a parliamentary inquiry into the UK banking industry and the operation of Libor – the London inter-bank offered rate.
The scandal involves banks that set daily interest rates via Libor – which measures how much banks must pay to borrow from one another. This key financial benchmark is used to price loans, mortgages and derivative contracts worldwide. Barclays colluded with other banks – which are also under investigation – to manipulate the Libor rate to their financial advantage. Some of Barclays’ own traders, with insight into how the Libor rate was set, engaged in what amounted to insider dealing. They used price-sensitive information to boost the bank’s profits, and their own annual bonuses.
Mr Diamond, who in 2005 took charge of the highly profitable investment arm of Barclays, was better placed than most to understand what was happening in the bank, where he had worked for 16 years, and which he had helped to shape and develop. A brash and controversial figure – once described by Peter Mandelson as the “unacceptable face of banking” – his buccaneering leadership style won him few friends and attracted much public and political criticism, both for his excessive pay - £17.7 million (€22 million) in 2011 – and for the bank’s involvement in dubious tax avoidance practices.
Between 12 and 18 banks are under scrutiny in Libor investigations of interest rate rigging. These banks may face similar financial penalties to those imposed on Barclays and, like it, they may find themselves exposed to substantial civil claims in the US and elsewhere. The scandal highlights the need for major changes in the culture and practice of banks. But above all, it now requires immediate reforms in how Libor is set, to ensure it is based on the actual cost that banks incur in borrowing from one another and not on their own flawed and self-serving estimates. To ensure this happens, Libor needs to be tightly regulated and made more accountable to the public. It has taken five years to bring these financial abuses by the banks to light, a measure of just how inadequate the oversight of Libor by various agencies has been in that period.