Expensive : Premiums often added 20%-50% to the cost of a loan Ineffective : Structured to limit the chances of a payout to someone who was genuinely ill Mis-sold : Without the customers knowledge, or sold as "essential", or sold to people such as the self-employed who would never be able to claim Inefficient : With claimants facing lengthy delays or complicated claims procedures http://uk.news.yahoo.com/barclays-sets-aside-further-700m-over-ppi-scandal-135616736--finance.html http://www.guardian.co.uk/business/2011/may/05/how-ppi-scandal-unfolded
In November 2007, bankers and other market participants began expressing concern to the British Bankers Association about whether Libor-setting banks were reporting rates that reflect their true borrowing costs. In May 2008, the Wall Street Journal published an analysis with findings that a number of banks submitted significantly lower borrowing costs for Libor than what other market measures, such as credit-default insurance. In March 2011, reports began to circulate that the U.S. Department of Justice, Securities and Exchange Commission, and the Commodity Futures Trading Commission had launched investigations in the Libor-setting banks for manipulating Libor. http://www.guardian.co.uk/business/2012/sep/10/barclays-reputation-battering-libor-scandal
Summary What should Barclays do to regain its glory? Pramod Jindal MBA Candidate 2013 email@example.com 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 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 2
Barclays PLC’s eight business segmentscontributed net revenues of $48 billion in 2011 3
Payment Protection Insurance (PPI) Scandal • PPI policies have been sold alongside loans to repay peoples 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 4
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 Submissions Average of arrive at an the undisclosed remaining location of rates = LIBOR Banks Thompson British submit the Reuters Banker’s inter-bank Association borrowing representative rates removes the highs and lows (outliers) 5
LIBOR Scandal: A Chronology Concerns raised The WSJ published that Reported BARC agreed to UBS agreed to whether submissions for LIBOR launch of $453M $1.5 B submissions for were significantly below investigations settlement with settlement withLIBOR truly reflected than those for Credit- by SEC, US CFTC, US DOJ CFTC, US DOJ, bank borrowing default insurance Dept. of and UK FSA UK FSA and costs Justice, CFTC SWISS FMSA Nov 2007 May 2008 March 2011 June 2012 Dec 2012 “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 6
Fallouts of LIBOR Scandal on Banking Industry• 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 7
Fallouts of LIBOR Scandal on Barclays • 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 8
Or the reasons not cited? Risk taking Inheritance of a Structured to Too big to Huge mentality failed promote risk manage reliance on taking capital (Lehman) culture marketsCapital market= Reliance on Insane Porous senior bailouts performance Chinese management targets Walls Ineffective Risk Management 10
How can Barclays rebuild itself? • 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) 11
Integrative solution to business problem Changing Promoting risk- Include Improve Capping prop trading hiring averse and liabilities clause transparency,strategies conservative visibility, Effective Chinese culture accountability walls and oversight in business linesRetail bankers to Payback BOE FLS Align employees’ Embrace BASEL III & occupy senior funds goals with the Dodd Frank positions bank’s Leadership training Capping Capital for senior managers Market business 12
Summary • 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 13
A particular slide catching your eye?
Clipping is a handy way to collect important slides you want to go back to later.