February 23, 2024

DealBook: Barclays to Pay Over $450 Million in Regulatory Deal

A branch of Barclays in London.Andy Rain/European Pressphoto AgencyA branch of Barclays in London.

Barclays has agreed to pay more than $450 million to resolve accusations that it attempted to manipulate key interest rates, the first settlement in a sprawling global investigation involving many of the world’s biggest banks.

The British bank struck a deal with regulators in Washington and London, as well as the Justice Department. The settlement is seen as the first in a series of potential cases against other major financial firms.

“When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined,” said David Meister, the enforcement director of the Commodity Futures Trading Commission, the American regulator involved in the Barclays case.

The broad investigation centers on the way Barclays and other big banks set key benchmarks for borrowing, lending rates that affect corporations and consumers.

Regulators have questioned whether the banks attempted to improperly set certain rates — including the London interbank offered rate, or Libor, and the Euro interbank offered rate, or Euribor — at a level that was favorable to their own institutions. Authorities are also looking at HSBC, Citigroup, JPMorgan Chase and other firms.

In the Barclays case, regulators say they uncovered “pervasive” wrongdoing that spanned a four-year period and touched top rungs of the firm, including members of senior management and traders stationed in London, New York and Tokyo. A 45-page complaint laid bare the scheme, describing how Barclays made false reports with the aim of manipulating rates to increase the bank’s profits.

The complaint also outlines how Barclays, at the height of the financial crisis, submitted artificially low figures to depress the rate and deflect scrutiny about its health. The bank at the time faced concerns that it was reporting high borrowing rates pointing to a weak financial position.

The practice prompted unease among some employees, who worried the bank was “being dishonest by definition.”

The Barclays settlement represents a record for the two regulators. The futures commission levied a $200 million penalty, the largest in its history, while the Financial Services Authority in London imposed a $92.8 million fine. As part of the settlement deal, the Justice Department agreed to not prosecute Barclays, although federal prosecutors are continuing a criminal investigation into other banks and bank employees.

“The events which gave rise to today’s resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business,” the Barclays chief executive, Bob Diamond, said in a statement. “When we identified those issues, we took prompt action to fix them and cooperated extensively and proactively with the authorities.” Mr. Diamond added that he and three other top executives had voluntarily agreed to give up their bonuses this year.

In the aftermath of the financial crisis, global regulators have been looking into whether many of the world’s largest banks attempted to manipulate Libor, a measure of how much banks charge each other for loans. In essence, the benchmark is an average of the interest rates at which that the big banks say they can borrow from the capital markets.

An important barometer of the health of the financial system, the rate not only affects big banks and corporations but also homeowners. Libor and similar rates are used to determine the price for more than $350 trillion worth of financial products, including complex derivatives, student loans, credit cards and mortgages.

At least nine agencies, including the Justice Department, the Financial Services Authority of Britain and Financial Supervisory Agency of Japan, have centered their investigations on Libor. Authorities are also looking into the activity surrounding similar benchmarks known as Tibor, the Tokyo interbank offered rate, and Euribor.

“Barclays’ misconduct was serious, widespread and extended over a number of years,” Tracey McDermott, acting director of enforcement and financial crime at the Financial Services Authority, said in a statement. “Barclays’ behavior threatened the integrity of the rates with the risk of serious harm to other market participants.”

Libor and the other interbank rates provide benchmarks for global short-term borrowing, and are published daily based on surveys from banks about the rates at which they could borrow money in the financial markets. Currently, more than a dozen financial firms, including JPMorgan, Bank of America and HSBC, provide information to set the daily American dollar Libor rate.

Regulators are investigating whether banks shared information between their treasury departments, which help to set Libor, and their trading units, which buy and sell financial products on a daily basis. Financial institutions are expected to maintain so-called Chinese walls between the two divisions to avoid confidential information being used to turn a profit as part of banks’ daily trading operations.

Analysts say the Libor system, which was created in 1986 and is overseen by Thomson Reuters on behalf of the British Bankers’ Association, does not provide sufficient transparency about how banks set their daily interest rates for borrowing in the financial markets.

When many banks were unable to borrow in the financial markets during the financial crisis, authorities raised concerns about the figures that firms were using to set Libor.

As bank funding costs rose to historic highs after the collapse of Lehman Brothers, regulators started to worry that financial firms might have submitted low interest rate figures that underpin Libor to appear in stronger financial positions than they actually were. With limited oversight over how banks set the rates, analysts say a bank could have provided lower figures in an effort to artificially keep its actual borrowing costs down.

Since then, regulators in the United States have issued subpoenas to several banks, including Bank of America, UBS and Citigroup, about how Libor was set. The Competition Bureau of Canada is investigating the activities of JPMorgan, Deutsche Bank and several other major banks about their activities around Libor. Japanese, Swiss and British authorities are also conducting their own inquiries into how the interbank rates have been set over the last five years.

In 2011, Charles Schwab, the brokerage firm and investment manager, sued 11 major banks, including Bank of America, JPMorgan and Citigroup, claiming they conspired to manipulate Libor.

Last August, Barclays disclosed that American and European authorities were investigating the activities of the British bank and other financial institutions concerning how Libor was set. The inquiries had been focused on accusations that Barclays and other firms suppressed interbank rates from 2006 to 2009, according to a statement from the British bank. Barclays had said it was cooperating with the investigation.

The British Bankers’ Association, Libor’s sponsor, defends its rate-setting process, though the trade body established a committee earlier this year to revise how the rate was set. The changes are expected to focus on establishing guidelines, including which bank employees can be told about the daily interbank rates and which specific financial instruments can be used to set Libor.

Barclays statement of facts from the Justice Department

Article source: http://dealbook.nytimes.com/2012/06/27/barclays-said-to-settle-regulatory-claims-over-benchmark-manipulation/?partner=rss&emc=rss