Barclays Bank Research Articles

Systemic operational risk: the LIBOR manipulation scandal

The manipulation of the London Interbank Offered Rate (LIBOR) was not a localized event. Unscrupulous traders and managers in some of the largest banks around the world deliberately and systematically manipulated borrowing rates. It was not the work of isolated "rogue traders" but part of business-as-usual in the international money markets. This paper describes the LIBOR scandal and argues that it is an example of systemic operational risk, in particular people risk. The paper first describes the LIBOR setting process. The explosive growth over the past twenty-five years in the use of interest rate swaps (IRSs) and the process of resetting rates on IRSs, which ultimately led to the unethical manipulation of the underlying LIBOR rates, is then described. The paper then looks at official inquiries into manipulation of LIBOR at three banks, Barclays, UBS and Royal Bank of Scotland, to identify examples of operational risk. The transcripts of conversations unearthed by these investigations show rampant illicit activities that were apparently a normal part of doing business, as traders, LIBOR submitters and brokers colluded to manipulate LIBOR for their own interests. Finally, the paper makes some suggestions as to how the management of systemic operational risks may be addressed by banks and regulators.

Corporate Governance in Banks – A View Through the LIBOR Lens

Misreporting of borrowing rates by large banks and the resulting manipulation of LIBOR (London Interbank Offered Rate) has been the subject of headlines news recently. Confronted with charges from regulators several banks, such as Barclays, UBS, and Royal Bank of Scotland (RBS), have paid huge fines and settled the matter to avoid criminal prosecution. The scandal raises serious questions of corporate governance, and this article examines the issue from the governance perspective, using Barclays as a case-study. There were internal failures at several levels in Barclays in the misreporting of rates which was mainly of two varieties – misreporting for personal gain and misreporting encouraged by senior managers, ostensibly in the corporate interests. The article argues that corporate governance systems and structures are powerless in dealing with such fraud or lack of judgment. Misreporting for personal benefit was clearly a breach of the fiduciary duty of loyalty of the managers involved. But misreporting, ostensibly to protect corporate interests, is more probably a breach of the emerging fiduciary duty of good faith. The article also points out that the misdeeds occurred in the banks during an era of financial liberalization and permissiveness, which undoubtedly impacted the management culture at the banks. In particular, the loose structure of interest derivatives and the potential they offered for speculation were a factor in the practices seen at the banks involved in the LIBOR episode.

Quistclose Trusts: was Lord Wilberforce right after all?

The trust arrangement found by Lord Wilberforce in Barclays Bank v Quistclose Investments has been the subject of a fierce debate seeking to explain its precise nature and reconcile it with established principles. It is argued that six of the principal explanations discussed in this debate have been exposed as deficient, either as inconsistent with orthodoxy or as requiring an unrealistic construction of the facts. It is further argued that the explanation originally given by Lord Wilberforce has been missed, and that this explanation avoids both of these problems.

The LIBOR Reader

Short articles on the LIBOR scandal looking for a deeper understanding of the crisis At the end of June 2012, news of a further scandal in the banking industry broke – although, there was widespread knowledge about this problem within the industry. One UK bank, Barclays, had fines levied by the US and UK authorities for manipulating a key interest rate index called LIBOR. Other banks are still under investigation. LIBOR is an important market interest rate indicator because it measures the rate of interest at which banks can lend to each other, although, as the article by Stephanie Flanders shows, it does not necessarily measure the rate of interest at which banks actually do lend to each other. Many other financial contracts are therefore priced using LIBOR. For example, it would be reasonable for a bank to offer a mortgage product with a floating rate of interest of “LIBOR plus 1.5%”. The bank could then be reasonably sure that, whatever happened to central bank interest rates, it could obtain funds at LIBOR to fund the mortgage, with a fixed margin for credit risk and expenses. In addition, many important derivative products are priced using the LIBOR interest rates. These products are used for long-term risk management purposes as well as being traded. Quite quickly, two separate aspects of this scandal emerged. The first was that banks seemed to have been manipulating the rates that are used to calculate LIBOR so that their derivative positions on LIBOR contracts would show higher trading profits. The second was that, at the height of the financial crisis, Barclays bank seems to have reduced its LIBOR submissions to the British Bankers’ Association in order to give the impression to the market that others were willing to lend to Barclays at lower interest rates than was actually the case. The idea of this action was to give the impression to the market that those lending money to Barclays were less concerned about the credit risk of Barclays than they were in practice. The excellent short articles in this reader on the LIBOR scandal look for a deeper understanding of the crisis rather than taking the view that: “something has gone wrong, therefore we obviously did not have the rules to stop it, therefore we need more rules.”

Structured Products Selling Risk, From Pricing to Risk Management

A new investment product category so-called “Structured Products” arises for the past decade and aims to supply more important return than conventional assets by providing a pre-packaged investment strategy. Unfortunately dealing with such complex structures is quite challenging whatever the implied business desk. Indeed this product category introduces lots of discontinuities (options structures with embedded indicator functions, underlying stochastic process, market data) which are quite challenging regarding the pricing process.In this dissertation, we will present how to manage a risk exposure generated by an inventory constituted by different structured products, so-called “Pipeline Risk”. To do this, we will define and implement a risk measure based on the well-known “Value-at-Risk” (VaR) approach. This involves estimating the potential loss on current inventory according the underlying risk factor(s) variations and the structured products’ sensitivity factors.Due to the inner complexity of such products, market practitioners have only one method of reference to evaluate a structured product: the Monte Carlo Approach. However this method produces unstable results in presence of discontinuities (especially on sensitivity factors) which is a major flaw in Risk Management. So we will use an alternative pricing approach with the use of a Fourier Transform based approach so-called “Fourier Space Time-stepping” (FST) method.This method solves the partial integral differential equation with help of a backward stochastic differential equation (BSDE) in Fourier Space and a vector of intrinsic values defined in Real Space. This integration process allows the aggregation of new conditioned intrinsic values at intermediate maturities. Finally we produced a complex vector representing the actualized value of the option structure which can supply either the price or the adequate sensitivity factor estimation by multiplying this vector with the adequate factor.We will show the FST pricing capacities by producing a benchmark constituted by eight classical options and three structured product examples. Through this benchmark we will notice that the FST method supplies accurate, fast and stable results whatever the priced item (Price, first order and second order derivatives) and then constitutes a relevant alternative pricing method for structured products.The last part of this dissertation will focus on the integration of the FST method into the Pipeline Risk Framework used in Barclays Bank Plc. Thereby we will investigate the influence of Fourier parameters on pricing quality but also how to calibrate this method with market data. Thereby we will use a bootstrap-like approach to calibrate characteristic exponent factors. This will allow solving an important issue, well known from Monte-Carlo practitioners: the integration of complex forward implied volatility nodes during the pricing process.

Business Experience and Start-Up Size: Buying More Lottery Tickets Next Time Around?

This paper explores the determinants of start-up size by focusing on a cohort of 6247 businesses that started trading in 2004, using a unique dataset on customer records at Barclays Bank. In our theoretical model, post-entry growth is treated as a random walk, and start-up size is positively related to survival. In this view, business experience does not have any impact on post-entry growth (since growth is random), but is associated with higher survival if entrepreneurs with prior business experience have a larger start-up size. Quantile regressions show that prior business experience is significantly related with start-up size, as are a number of other variables such as age, education and bank account activity. Quantile treatment effects (QTE) estimates show that business experience leads to a higher start-up size, with the effect of business experience on (log) start-up size being roughly constant across the quantiles. Prior personal business experience leads to an increase in expected start-up size of about 48%. IVQTE estimates are even higher.

Development through football in Africa: Neoliberal and postcolonial models of community development

Informed by academic writings on non-governmental organisations (NGOs), critiques of neoliberal development, and postcolonial development theory, this paper explores the relationship between football and development through critical analysis of two contrasting initiatives. One is the Football for Hope Movement (FHM), which was the principal backer of the official campaign of the 2010 FIFA World Cup (FWC), called “20 Centres for 2010”. The second is the Katina 2009 football tournament held under the auspices of a community development project in Uganda sponsored by the Guardian newspaper and Barclays bank in the UK.The initial aim was to identify the particular development models at work within ‘development through football’ initiatives. While an established model of NGO-led community development is certainly apparent, different initiatives suggest a basic distinction between neoliberal and postcolonial variants. The paper identifies and explains the differences while showing how contrasting models become sites of struggle and overlap, to some extent, when translated into development practice. Ultimately, the investigation reveals how football is used as a magnet to draw young people deeper into the operational orbit of NGOs and their donors. The paper also draws attention to new actors and partnerships in international development – most notably the Guardian, whose transformation into a development actor suggests a novel ‘NGO-isation’ of the media itself.

Hung Out to Dry? Nylon’s Fight with Barclays

This article examines the dispute in Barclays Bank plc v Nylon Capital LLP [2011] EWCA Civ 826 at the end of which the Court of Appeal, despite the parties having settled out of court and expressed a desire for commercial privacy, decided to hand down its judgment containing a number of issues of some general significance.

Work Matters: Finance - interest on loans

While interest rates are low, nurseries may want to consider fixed or capped rates on their borrowing. Ian Murchie, relationships director in the Barclays Bank Healthcare Team outlines the different options and their implications

Role of Push Vs Pull Factors in Employee Job Switch Decision

Man has always been the most complicated living being on this planet. It is considered next to impossible to accurately predict the behavior of human beings for any stimulus and the same stimulus generates different responses in different individuals. Considering the complicated nature of human beings, this research aims at finding out the role of different push vs. pull factors in employee job switch decision making. In this research, variables like compensation, job security, growth, promotion and development opportunity, better title/designation or compensation offered, work life balance, job employee fit etc. are taken into account to measure this role. A convenience sample of 60 respondents in a questionnaire based survey, there were 20 participants each from three companies which include Getz Pharmaceuticals, Barclays Bank PLC, Pakistan and Engro Polymer & Chemicals Ltd. The idea was to cover three major sectors of Pakistan. Unfair Compensation took the lead in the agreement percentage in respect of factor responsible for job switch decision with 76% agreement.

Work Matters: Finance - credit availability

As credit availability slowly begins to increase, some nursery businesses may see possibilities for growth. But they should remain realistic about what is achievable, says Ian Murchie, relationship director in the Barclays Bank Healthcare Team

Barriers faced by SMEs in raising bank finance

Purpose – The purpose of this paper is to use univariate statistical analysis to investigate barriers to raising bank finance faced by UK small and medium‐sized enterprises (SMEs), specifically the impact of personal characteristics (ethnicity, gender and education).Design/methodology/approach – A conceptual model was developed and the results of a telephone survey of 400 SMEs conducted (before the “credit crunch”) by the Barclays Bank small business research team were analysed. The survey was based on a large stratified random sample drawn from the Bank's entire SME population.Findings – It was found that education made little difference to sources of finance, except that those educated to A‐level more frequently used friends and family and remortgaged their homes. However, graduates had the least difficulties raising finance. Though statistically insignificant, women respondents found it easier to raise finance than men. The survey confirmed that – and this finding was statistically significant – ethnic...

Work Matters: Finance - opportunities for acquisition

Opportunities for acquisitions will reach a peak over the coming months, but in order to gain finance you will need to convince your lender of the long-term viability of expansion, says Ian Murchie, relationship director in the Barclays Bank Healthcare Team (ian.murchie@barclays.com)

Prospects for the UK Economy

The production of this forecast is supported by the Institute's Corporate Members: Abbey plc, Bank of England, Barclays Bank plc, HM Treasury, Nomura Research Institute Europe Ltd, and the Office for National Statistics.

Enterprise profiles in deprived areas: are they distinctive?

This paper examines the extent to which segmenting business activity on the basis of the relative deprivation of a given area provides additional understanding (in terms of analysis and policy) that is not obtained by alternative divisions, e.g., by sector, size, etc. The paper is primarily motivated by the explicit inclusion of a deprived area dimension to many UK small business/enterprise policies introduced since 1997. We use two datasets drawn from the customer records of Barclays Bank PLC to obtain an initial analysis of the business stocks and dynamics in deprived and non-deprived areas of England. The data indicate that the deprived areas of England vary systematically from the wider economy in terms of several business stock characteristics and associated dynamics. These differences include a lower proportion of business service firms, lower female involvement in the owner-manager base and a poorer risk profile. The analysis supports the view that there are likely to be benefits from the tailoring of small business/ enterprise policies to sub-national levels.

Are sovereign wealth funds “white knights”?

PurposeIn the continuing credit squeeze, sovereign wealth funds (SWFs) are still active in international lending and are eagerly sought out by large, cash‐strapped companies in the West. The purpose of this paper is to examine their nature and strategies before and after the onslaught of the credit crunch and global economic downturn in order to advise corporates on how best to design their strategies and terms in approaching the SWFs for funds.Design/methodology/approachAn analysis is made of SWFs in their dealings with Western corporate borrowers and a case study made of Barclays Bank which, faced with three major options in 2008 to raise a large amount of cash, chose to attract funding from three Gulf SWFs.FindingsSWFs certainly qualify as lenders of last resort (“white knights”), providing ready loans, albeit on premium terms, at a current time of severely restricted credit supply from other sources. Alternative sources of funds – stockholders and government bail‐out – also suffer from disadvantages relating to the characteristics of their loans.Practical implicationsCorporate borrowers should currently view SWFs as attractive “white knight” sources of loans when other providers are constrained. The analysis in this paper, including the experience of a major borrower, Barclays Bank, suggests that SWFs are demanding tougher terms as a result of their strong bargaining positions and historical losses, and that companies should tailor SWF loan contracts to contain maximum incentives and safeguards to produce successful results.Originality/valueThis is the first paper to analyse the new role and strategies of SWFs in the credit crisis context, as well as the required response of cash‐strapped companies seeking loans from them.

Internal branding in multicultural services organizations an exploratory study of Barclays Bank (Ghana)

An insight into how the internal branding process is to be managed to create a coherent brand understanding and commitment among multicultural organisations is largely lacking. The main aim of this study was to investigate and highlight the key factors involved in successful internal branding in a multicultural services organisation. Through an exploratory study of Barclays Bank-Ghana, a brand whose financial value has appreciated following a brand driven restructuring, this study has surfaced the key factors involved in internal branding. The findings show that the transformational role of leaders, brand alignment with business strategy, attention to building a purposeful brand-centred unifying culture, enabling employee buy-in, are critical to successful internal branding. The study also found that processes and systems alignment with brand values, cross-functional approach to performance management, and strong customer orientation, were other factors that are critical to successful internal branding at Barclays Bank. Concluding with a suggested modeling of the internal branding process, the study found the generation of brandcentred distinctive competences, through empowered and motivated HR as the goal of internal branding at Barclays.

Financial innovation in the UK: new tier-adjusted household sector monetary services indexes

This study is the first of its kind to focus on the effect of interest-rate tiers on aggregate measures of the monetary services flow. We address the role and impact of measurement errors in building monetary index numbers directly. Using a unique data set obtained from Barclays Bank plc, we construct two adjusted UK household sector measures of the aggregate monetary services flow. These are compared to an unadjusted household sector measure in a cointegration money demand framework. Our estimation results reveal only minor differences across the different systems based on different measures of the monetary services flow. This lends support to the 'standard' practice adopted by the Bank of England to use a single rate.

Prospects for the UK Economy

The production of this forecast is supported by the Institute's Corporate Members: Abbey plc, Bank of England, Barclays Bank plc, HM Treasury, Nomura Research Institute Europe Ltd, and the Office for National Statistics.

Africa awakening: Gilbert Ledward, Barclays Bank DCO and the end of empire

Africa awakening: Gilbert Ledward, Barclays Bank DCO and the end of empire