Barclays and LIBOR – is operational risk management relevant?
David Millar, risk consultant, trainer and former COO at global risk management association, PRMIA, discusses the Barclays-LIBOR rigging case, the bank’s survival chances, and whether ORM could have impacted the case. July 02, 2012 | David MillarBarclays has admitted guilt in attempting to fix the London Interbank Offered Rate (LIBOR) and will have to pay around half a billion US dollars in fines both in the US and the UK. The key words here are “attempting to fix”. There has been no admission that the bank has succeeded in doing so and this will be a key issue in the barrage of lawsuits that is expected to follow. Two-class action suits have already been launched in the US; one by the Baltimore city treasurer, and the other by influential broker Charles Schwab. How will Barclays be affected by this scandal? Sandy Chen, a banking analyst at Cenkos Securities, points out that one way of estimating damages would be to look at the difference in LIBOR before and after Barclays’ input to the rate setting process (refer to the article on how LIBOR operates). This would then be applied to Barclays’ notional interest rate derivatives which posted £35.5 trillion ($55 trillion) in volume at the end of 2011. If it could be proven (and this is the crux of the matter) that Barclays had influenced the rate by as little as 0.05%, just one eighth of the 0.4% that the Schwab case alleges, this would result in damage claims of about £2 billion ($3.1 billion) for each trillion of impacted derivatives. Therefore the amount at risk could be £70 billion (110 billion), over three times Barclays’ market capitalisation of £20 billion ($31 billion). In other words, the bank would go bust. And this is before any application of the US Sherman Act, an anti-trust law which means that actual damages can be triple the actual loss. And this does not just apply to Barclays. RBS, UBS, Citibank and Bank of America are all reportedly being investigated. These banks have a huge volume of interest rate derivatives in the market and as such may suffer from the same potential fate as Barclays. Admittedly, a high degree of pro... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Capital & Strategic Issues, Operational Risk Management, Regulation, Risk and RegulationCapital & Strategic Issues,Operational Risk Management,riskregulation,Risk and Regulation, Capital & Strategic Issues,Operational Risk Management,Regulation,Risk and Regulation, Keywords:Barclays, LIBOR, British Bankers’ Association, BCBS, Basel III, RBS, UBS, Citibank, Bank Of America Barclays, LIBOR, British Bankers’ Association, BCBS, Basel III, RBS, UBS, Citibank, Bank of America
|