Banks

BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Economy

Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Archive | November, 2016

UK orders review of interbank rates

Posted on 30 June 2012 by

The British government has ordered an independent review into the workings of interbank lending rates, a spokeswoman for David Cameron, the prime minister said on Saturday.

The decision, reported by Reuters, follows news earlier this week that US and British authorities fined Barclays $450m for manipulating the London Interbank Offer Rate (Libor), the rate at which banks lend to each other overnight.

    The Treasury Select Committee has called the Barclays chief executive, Bob Diamond, to appear before it on Wednesday. Non-executives, including Chairman Marcus Agius, will be questioned on Thursday.

    Andrew Tyrie, chairman of the committee, said the reputation of Britain’s financial services industry had been severely tarnished by the “scam”.

    “Restoring the reputational damage must begin immediately,” he said, “Parliament and the public need to know what went wrong and whether the perpetrators have been rooted out. We also need to be given confidence that this has been put right.”

    Barclays’ compliance department failed to act on three separate internal warnings between 2007 and 2008 about conflicts of interest and “patently false” submissions by its staff to the panel that sets the benchmark interest rate used to price mortgages and credit card loans worldwide.

    Some £3.6bn has been wiped off Barclays market value since the fine was announced on Wednesday as part of a probe that involves 20 banks across three continents.

    More banks are expected to be drawn into the scandal as the investigation continues and the affair has fuelled public outrage at the culture and practices of the banking industry.

    Taxpayer-backed Royal Bank of Scotland confirmed it was being investigated for manipulating Libor, PA reported.

    Ed Miliband, the Labour leader, has called for a full-scale public inquiry into banking culture and practices after the City was rocked by two major scandals in the space of a week.

    The Labour leader said the industry was plagued by an “institutional corruption’’ that could only be eradicated by introducing a tough new code of conduct and jail sentences for immoral bankers who abuse the system.

    Mr Miliband pushed for a 12-month probe to “find out what is going on in the dark corners of the banks’’ after the FSA uncovered “serious failings’’ in the sale of complex financial products to small businesses, just days after the rate-rigging affair emerged at Barclays.

    In an interview with The Times, Mr Miliband said: “There hasn’t been a proper reckoning for what happened in the banking crisis. The bankers told us – it’s all fine, we’ve cleaned everything up. But I’m afraid that doesn’t hold water any more.’’

    CFTC offers concession on overseas swaps

    Posted on 30 June 2012 by

    Large US banks with overseas derivatives operations may be able to dodge new US swaps rules, potentially easing industry concerns that American law would apply all over the world.

    The Commodity Futures Trading Commission, America’s top derivatives regulator, on Friday issued proposed guidance that call for foreign branches of US banks to be subject to derivatives rules in the countries in which they are located so long as the CFTC deems them comparable to US rules.

      The expected move was a concession to banks including JPMorgan Chase which had argued against the CFTC enforcing certain requirements on swaps transactions occurring overseas.

      Large US and European banks have complained about the CFTC’s implementation of derivatives rules connected to the 2010 overhaul of US financial regulations known as the Dodd-Frank Act.

      They argued that the CFTC was taking a much more aggressive approach to rein in the historically opaque market than necessary.

      Under the new guidance, if JPMorgan Chase’s London branch enters into a derivatives deal with a Goldman Sachs affiliate in London, the transaction could be governed by local rules with the CFTC’s blessing.

      The five-man commission voted unanimously to issue its proposal as guidance, rather than as a proposed rule. Standards that are issued in the form of a guidance allow the agency more flexibility in applying them to market participants.

      Californian city of Stockton files for bankruptcy

      Posted on 29 June 2012 by

      The California city of Stockton has filed for bankruptcy protection after failing to cut deals with creditors over crippling labour and borrowing costs, the largest bankruptcy of a US city in decades.

      “Our general fund resources are depleted and we cannot allow the city to spiral into uncontrolled default,” said Bob Deis, city manager on Thursday. “Bankruptcy stops a barrage of lawsuits and allows the city breathing room while working toward a plan of adjustment and moving Stockton forward.”

        Under the plan adopted by the city council on Tuesday, the city will suspend payment on bonds, cut the salary and benefits of municipal employees, end contributions for retiree’s medical insurance and modify labour agreements.

        The city however said that its residents will not see any changes in services from the plan and pledged to continue to pay workers and vendors on time.

        “We are extremely disappointed that we have been unable to avoid bankruptcy,” said Mayor Ann Johnston. “This is what we must do to get our fiscal house in order and protect the safety and welfare of our citizens. We will emerge from bankruptcy with a solid financial future.”

        Stockton’s financial woes stem from a decade of over-borrowing and overambitious revenue projections based on a housing boom that went bust with the foreclosure crisis in 2009.

        The city, with a population of 300,000, faces $319m in outstanding debt, plus $450m in health insurance and pension liabilities for city pensioners. It forecast a $26m deficit in the budget for the next fiscal year, starting on Sunday.

        It was the first to turn to a new California law, AB 506, which allowed the city to pursue professional mediation with its creditors to reach an agreement before going to a bankruptcy court.

        Stockton is the largest city by population to file for Chapter 9 since at least 1960, according to James Spiotto, a partner at the law firm Chapman and Cutler.

        There have only been 49 filings for cities, towns and counties since 1980, he said.

        Over the past few years, concerns have grown of rising defaults and bankruptcies for US municipalities as many areas remain squeezed by a fall in tax revenues after the recession and property bust at the end of the past decade.

        Jefferson County, Alabama, last year filed the largest municipal bankruptcy in terms of debt. But fears of sweeping local failures have yet to materialise. That has cheered the US municipal bond market, where states and local governments raise money, which has rallied in 2011 and 2012.

        Yields have fallen to historic lows in line with falling rates for US government bonds.

        Since the Great Depression, investors in the muni debt of cities have largely recouped their money even in cases of default and bankruptcy. Rating agencies Standard & Poor’s and Moody’s however both cut their ratings on Stockton’s debt on Wednesday following the city council’s vote for bankruptcy.

        The Long View: testing Spain and Italy defences

        Posted on 29 June 2012 by

        Thirty months of hurt never stopped me dreaming. As so often, football mirrors life. On Thursday night, hours after Italy surprisingly but convincingly defeated Germany in the semi-final of Europe’s football championship, Germany took another defeat at the EU summit.

        Judging by the market reaction, traders were hoping for a German defeat, but surprised that it happened. The result was the latest politically driven bounce for risk markets, continuing a pattern that has persisted for about 30 months, since Greece’s fiscal crisis erupted in early 2010.

          For the eurozone, the longer term trajectory is unmistakable. The crisis continues to worsen. But every few months, politicians create an excuse for a rally.

          Proof lies in the spread between the yields payable by Spanish government bonds and German Bunds, which shows the perceived risk of a Spanish sovereign default – an event that might well bring an end to the euro. The summit sparked the sharpest improvement in this spread since August last year. Its tightening was even greater than following last December’s news that the European Central Bank would lend money on lenient terms to banks in a series of long-term refinancing operations – a manoeuvre that sparked a three-month rally.

          This big surprise could change the terms of reference for many, as it happened on the last day of the first half of 2012. Like football, investing is a game of two halves. Many look at six-monthly figures and, thanks to Friday’s return of confidence, the FTSE-Eurofirst 300 is back almost exactly where it started the year, in dollar terms. Other stock markets have been somewhat positive, while commodities have done badly.

          Broadly, there were two ways to make serious money. One was to time the shifts in sentiment; buy European stocks at the outset, because the ECB had spurred a boom, switch to sell them short (profiting from a price fall) on March 13 when the Eurofirst peaked for the year, then buy again on June 4. It adds up to a gain of 50 per cent. Perform the same trick with the volatile eurozone banks index and there was an 82 per cent gain by the beginning of March. The problem is that such market timing requires betting on politicians, which is dangerous.

          The other way to make money, much more stably, was to bet at the outset that the crisis would worsen. Borrowing Spanish 10-year bonds and selling them in order to buy 10-year US Treasuries would have made you 19 per cent. Buying protection against Spanish default on the swaps market would have made 42 per cent.

          Could the summit really have reversed this? Could it have sparked another “risk-on” rally? Or will it be forgotten by next week?

          The politicians do appear to have made more progress than expected. Critically, the European Stability Mechanism (ESM), the main EU-wide vehicle for aiding sovereigns in trouble, can henceforth aid banks directly. Until now, it needed to help banks via loans to their sovereign governments – meaning that the debt for those sovereigns would increase with any bank bailout. This could be important; the crisis is so severe in large part because it links two crises, for banks and governments.

          Secondly, when the ESM makes “bailout” loans to governments, starting with Spain, it will not automatically enjoy sovereignty over other creditors. This could also matter a lot. Bailout funds so far have perversely driven existing private sector investors out, because they have been forced further back in the queue for repayment in the event of any default. Their exit pushes up bond yields (which are governments’ borrowing costs). So this could help to fix the dynamic that has pushed up sovereign borrowing costs throughout the crisis.

          Finally, the ESM will be allowed to dive into bond markets to bring down yields, rather than make loans direct to governments, and it will be empowered to do so without first waiting for the politicians to agree to new austerity measures. That should make the ESM much nimbler.

          But, conditions and timing remain unclear. Central problems remain: governments are running unsustainable deficits; austerity policies are only worsening government finances; Greece remains at risk of bankruptcy; and the moves to pool borrowing and banking regulation among the eurozone’s members, which would solve the crisis, continue to require the kind of ceding of sovereignty that could take years to negotiate, and that electorates may not accept.

          In sum, this summit sharply improves the chances of keeping the capital markets in check, but does little to deal with the longer-term problem. A logical outcome for markets would be a recovery for a while, followed by another downturn. The two halves of this year could look very similar. But at least one of Italy and Spain will enjoy a moment of triumph before it is over.

          Central banks reduce euro holdings in Q1

          Posted on 29 June 2012 by

          Central banks reduced their holdings of the euro in the first quarter of the year despite a period of relative calm for the eurozone, in the latest sign that global reserve managers have become more cautious on Europe.

          Global reserve managers cut euro holdings and added Japanese yen, British pounds and Swiss francs in the first three months of the year, according to an analysis of quarterly figures from the International Monetary Fund.

            Total foreign exchange reserves rose by 2.2 per cent from $10.2bn to $10.4bn, marking the biggest quarterly rise since the second quarter of last year.

            Just 55 per cent of reserves are reported in the IMF’s Composition of Foreign Exchange (Cofer) data – with China notably absent.

            Holdings of the euro dipped from 25 per cent to 24.9 per cent of reported reserves. Adjusting for valuation effects, euro holdings fell 2 per cent during the period, according to an analysis by Citibank.

            “The euro selling confirms indications of growing concern among reserve managers that the euro crisis is unlikely to be resolved as easily as advertised,” said Steven Englander, head of foreign exchange strategy at Citibank.

            Central bank reserve managers can be significant movers of the $4tn-a-day currency markets. Investment bankers say the group can account for well over a quarter of daily flows when they choose to be active in the market.

            Holdings of “other” currencies during the quarter – including the Australian and Canadian dollars – also fell, bucking a recent trend for central banks to move more of their assets into less liquid currencies.

            Holdings of the Japanese yen, at just less than 2 per cent of total reported reserves, rose more than 7 per cent after adjusting for valuations.

            “The yen is not a preferred holding and has been going down over the years – it shows how desperate reserve managers are for safe havens,” said Mr Englander at Citi.

            However, euro reserve growth was still up on an annual basis when compared with the first quarter of 2011. Analysts at Deutsche Bank calculated that euro reserves were 7 per cent higher on an annualised basis while US dollar reserves rose 9 per cent, accounting for valuation changes.

            “The data suggests that central bank selling of the euro had as of the first quarter yet to become a major euro negative factor, even if central banks equally are not acting as a counterweight to private sector selling,” noted Alan Ruskin, foreign currency strategist at Deutsche Bank.

            Ecclestone still in prosecutors’ sights

            Posted on 29 June 2012 by

            Bernie Ecclestone is “the cat who has already proved he has nine lives”, says a senior executive at a Formula One racing team.

            To observers who have seen up close how the 81-year-old has remained at the helm of motorsport’s multibillion-dollar circus over the decades, the F1 ringmaster this week looked as if he may have lost at least one of those lives.

              F1-graphicClick to enlarge

              It was a week that finally brought to a close the corruption trial that has hung over the sport like a noxious engine smell for more than a year and uncovered some of the intriguing ways in which Mr Ecclestone does business.

              Gerhard Gribkowsky was the chief risk officer presiding over the sale of German state bank BayernLB’s F1 stake to private equity group CVC Capital Partners in 2005.

              This week he was convicted in Munich
              of accepting corrupt payments, breach of trust and tax evasion and sentenced to eight and a half years in jail.

              Last week brought Mr Gribkowsky’s confession to having taken $44m in bribes from Mr Ecclestone and Bambino, a family trust for the F1 chief’s children. The confession secured the ex-banker a lighter sentence.

              With the trial over, Mr Ecclestone and CVC – hoping to exit F1 via a flotation – must have hoped the matter was finally laid to rest.

              Post-trial, Mr Ecclestone was attempting a business-as-usual demeanour. He put his name and money behind an unlikely project to stage a Grand Prix in central London. But no one believes German prosecutors are about to close the case.

              “The prosecutors’ attitude has been quite aggressive in the last couple of days,” says one person who knows Mr Ecclestone well.

              That much was clear when prosecutor Christoph Rodler summed up his case on Wednesday. He took issue with Mr Ecclestone’s claim in the witness stand that he paid the bribe because Mr Gribkowsky threatened to cause him trouble over his tax affairs.

              Mr Ecclestone’s witness box appearance back in October showed him in one of his whimsical, devil-may-care moods. At one point, he talked about the confrontation with Mr Gribkowsky like a scene from an old “gangster film”.

              To laughter from the public gallery in room A101 of the court near Munich’s Löwenbräu brewery, Mr Ecclestone said at one point: “I said I was going to make some sort of payment to him and we would sort out later what it is for.”

              Prosecutors also say Mr Ecclestone received a $41m commission from BayernLB for his role in the sale to CVC – for which help Mr Gribkowsky was found by the court to have caused the bank financial damage.

              Mr Ecclestone’s account was “nebulous”, Mr Rodler said. The court had heard evidence that the F1 chief was “not the victim of an extortion but the accomplice in an act of bribery”, he added.

              Judge Peter Noll added to Mr Ecclestone’s discomfort, saying he was the “driving force” whose “charm, sophistication, economic power and long experience” had brought Mr Gribkowsky into committing the crime and not the other way around.

              “No idea,” said Mr Ecclestone, when asked by the Financial Times whether he expected to face charges.

              To date, he has neither been accused of wrongdoing nor been charged, but he remains under investigation. “What we ought to do is wait and see, shouldn’t we?” he said.

              For CVC, whose co-founder Donald Mackenzie also appeared in court as a witness, the next move by German prosecutors could undermine its exit strategy.

              Indeed, the flotation prospectus listed among risk factors the potential damage to Mr Ecclestone’s reputation from the Gribkowsky trial as well as the fact he is facing a UK civil suit and an inquiry by HM Revenue & Customs. The prospectus also said F1 had a succession plan in place.

              What is understood is that any charges laid against Mr Ecclestone would result in his suspension as chief executive.

              CVC declined to comment. However, if prosecutors seek to extract a financial penalty from Mr Ecclestone to settle the case, the private equity group may stick with the status quo.

              That is because Mr Ecclestone remains the all-knowing king of F1.

              In his confession, Mr Gribkowsky described the F1 business as little more than a collection of contracts in a filing cabinet.

              CVC knows that better than most. Having paid $1.6bn to secure a majority stake in F1 six years ago, it harbours hopes of a $10bn valuation from a public listing, which has been delayed by market volatility.

              Stake disposals this year to institutional investors yielded $2.1bn for CVC, which retains 35.5 per cent of F1.

              But investor interest in the flotation is sufficiently high that CVC may still complete its exit whatever fate befalls the man it has relied on to drive the business forward.

              “Bernie Ecclestone is completely unique in what he does,” said the F1 racing team executive. “That is a positive thing as well as unconventional.”

              Merkel faces up to stormy parliament

              Posted on 29 June 2012 by

              Chancellor Angela Merkel returned to a stormy German parliament on Friday after backing new measures to prop up weaker eurozone economies at a summit in Brussels.

              Hours after eurozone leaders agreed to inject capital directly into Spanish and Irish banks, and to help lower Italian borrowing costs, Ms Merkel faced criticism from lawmakers as the Bundestag debated ratification of the European Stability Mechanism, the bloc’s new rescue fund, and a new EU treaty enshrining fiscal discipline.

                The opposition Social Democrats summoned Wolfgang Schäuble, finance minister, to attend an emergency meeting of the Bundestag’s powerful budget committee, with senior lawmaker Carsten Schneider demanding he explain Ms Merkel’s “180-degree about-turn” from previously blocking direct cash injections.

                Dissatisfaction was also voiced by members of Ms Merkel’s coalition, who worried she might have compromised her principle of giving aid only with tough conditions.

                Wolfgang Bosbach, a lawmaker from Ms Merkel’s Christian Democratic Union and long-standing opponent of eurozone aid, said summit decisions about direct bank aid and readier help to lower sovereign-bond rates had seen Germany “finally and irrevocably” abandon the EU’s no bailout clause.

                Ms Merkel was counting on the support from her coalition of Christian and Free Democrats as well as the Social Democrats in the votes as the German constitution requires a two-thirds majority for laws related to budget issues. Previous votes indicated she would easily get the 414 of 620 Bundestag votes required to pass the two laws.

                Ms Merkel left Brussels insisting she had reached “a good compromise” and German taxpayers’ money would not be committed in the eurozone without strict conditions.

                She said there was no increase in the amount of Germany’s financial guarantees in the eurozone rescue funds, and no retreat on Germany’s refusal to contemplate jointly guaranteed eurobonds as a way to help finance the most debt-strapped eurozone member states.

                She said the commitment to use eurozone rescue funds to buy sovereign bonds for countries facing market pressure would still be subject to conditions.

                “I insisted that the current procedures should be maintained, and I think we found a good compromise,” she said.

                “There will be conditionality,” she added. A country such as Italy would have to apply for market intervention and sign a memorandum of understanding based on the European Commission’s recommendations before bond-buying would be approved in the primary market.

                Ms Merkel singled out the agreement on banking supervision by the European Central Bank as a key result, saying: “I have great faith in the ECB, because the ECB has a great interest in having healthy banks.”

                Facing criticism that the German parliament was being asked to approve establishment of the ESM after its rules had been changed, the chancellor said that all the changes would be subject to further Bundestag votes.

                Ms Merkel told the Bundestag that
                the summit decisions were “good and sensible”, even if she had to concede that “differing communications” from various eurozone leaders about what exactly had been agreed had “led to a whole number of misunderstandings”.

                Jürgen Trittin, parliamentary head of the opposition Greens, said allowing the rescue funds to directly recapitalise banks and to buy sovereign bonds were the right moves. “These are positions Ms Merkel always rejected and which she now has had to accept,” he said.

                Herman Gröhe, CDU general secretary, said the summit agreement in Brussels maintained the government’s guiding principle of “only letting mutual responsibility [for others’ debts] come after the institution of political controls”.

                Norbert Barthle, a senior Christian Democrat, also said summit decisions had “no bearing” on Friday’s votes in both the lower and upper chambers of parliament. “Many hurdles” had to be cleared until banks could apply for direct capital injections – and the Bundestag would first have to approve this new instrument when ready.

                Otto Fricke, a senior Free Democrat, said the agreements by EU leaders could “only become law if the Bundestag passes them”. Some ideas being touted at EU level continued to be “wishful thinking”, while “others will prove hard to implement”.

                The gathering storm

                Posted on 29 June 2012 by

                A general view of the head office of Barclays bank in Canary Wharf, east London.©EPA

                “We are being dishonest by definition and [we are] at risk of damaging our reputation in the market and with the regulators.”

                Thus wrote one Barclays banker, on December 4 2007, to “manager E”, according to regulatory documents published this week by the UK Financial Services Authority. Five years on it is clear that the subject of those prophetic words – the price-manipulation scandal in the interbank lending market whose vast scale was unveiled by regulators this week – has done a lot more than just reputational damage.

                  Barclays has paid a record £290m in combined fines to settle investigations by the FSA, the US Department of Justice and the Commodity Futures Trading Commission (CFTC), the US futures regulator.

                  Now the scandal threatens to unseat the bank’s top management, with some shareholders, commentators and politicians calling for the head of Bob Diamond, chief executive; David Cameron has gone almost as far. “People have to take responsibility for their actions and show how they are going to be accountable for those actions,” the UK prime minister said on Thursday.

                  On top of the wrongs of the scandal involving the manipulation of the London Interbank Offered Rate (Libor) – a central financial reference point for everything from the rates charged to credit card users to the pricing of commercial loans – in the eyes of many politicians and much of the general public Mr Diamond carries a stigma: he is a banker.

                  Across much of the western world, bankers have acquired pariah status since the financial crisis began in 2007 – blamed for helping to cause it, and for continuing to pay themselves a fortune, even when governments have bailed them out and shareholders have seen their investments plummet.

                  Compounding that has been a succession of consumer mis-selling scandals, one of the latest and largest of which in the UK has forced banks into a forecast £6bn of compensation payouts over missold payment protection insurance (PPI). A recent massive IT failure at the largely state-owned Royal Bank of Scotland group that saw customers unable to conduct basic banking business has only added to public questions about competence in the sector.

                  As such the prime minister’s words were a pithy expression of the mounting fury among politicians over the excesses of what remains one of the UK’s biggest industries, but also one that is increasingly scorned by the public and which policy makers have – as yet – to bring it to heel.

                  The Libor affair adds a powerful dimension to the reputational disaster enveloping the banking sector – with the potential to eject bank bosses around the world and harden regulators’ resolve to pile yet tougher rules on an already beleaguered sector.

                  Though it sounds more abstruse than other recent scandals, Libor has a very real-world impact, underpinning the terms of $350tn of borrowing contracts worldwide. Libor rates are set by a panel of banks on the basis of what they disclose to be their average cost of interbank borrowing. But as the documents divulged by regulators in the Barclays settlement suggest, the process was abused by a number of those groups systematically and over a period of many years, both before and during the crisis.

                  Lord Turner, chair of the FSA, says “we would be fooling ourselves” to assume the alleged malpractice in Libor were not current in other types of trading. “There is a degree of cynicism and greed which is really quite shocking . . . and that does suggest that there are some very wide cultural issues that need to be strongly addressed.”

                  In Barclays’ case, the first to be fully documented by regulators, the evidence shows it broke rules barring different parts of the bank from speaking to each other and at the same time lied in its submissions to the rate-setting process. Before the crisis, traders sought to manipulate Libor rates to help make a profit. And in the teeth of the crisis in late 2007 and early 2008, under the encouragement of mid-level management, the bank deliberately underreported the rates it could borrow at in order to calm jittery investors.

                  “[Manager E]’s asked me to put it lower than it was yesterday . . . to send the message that we’re not in the shit,” one person involved in submitting its borrowing rates to the Libor panel said in an email at the time.

                  The Libor scandal still has some time to run, with other banks expected to be fined. Barclays is the first to suffer big fines but UBS and Citigroup have both been disciplined in Japan and the likes of HSBC, Royal Bank of Canada and RBS have been mentioned in court documents. Critics say Libor was a case of market manipulation just waiting to happen. As in many areas of the markets for bonds, derivatives and commodities, indices are often drawn up on the basis of the prices submitted by banks and dealers. This contrasts with equity derivatives, which are priced with reference to how shares trade on public stock markets. Because there is no equivalent to a stock market for many bonds, and derivatives, price-setting is more opaque – and open to abuse.

                  Such indices are vital in derivatives markets because trillions of dollars in swaps and futures contracts are traded on the basis of these prices, setting the level of products such as mortgages and savings accounts. That gives traders a heavy incentive to distort prices in their own favour.

                  “The problem is, if you don’t have a central market where prices are set, how do you get them?” says Craig Pirrong, a professor at the University of Houston. “When there is big money at stake, the mechanisms tend to get very brittle.”

                  Libor is not the first price-manipulation affair in banking but it is one of the most serious, recalling the Treasury bond scandal at Salomon Brothers in 1991 that imperilled Salomon, now a part of Citigroup. Its chief executive, John Gutfreund had to resign after Paul Mozer, a bond trader, submitted false bids in the T-bill market.

                  A similar scandal erupted in the US natural gas market in 2002 when the CFTC fined a number of companies. One of them was found to have kept a spreadsheet of prices labelled “bogus”, as the real ones. In a recent speech Scott O’Malia, a CFTC commissioner recalled the energy sector as “the wild wild west” in which “no one quite knew who was the sheriff and who was the outlaw.”

                  More recently questions have been raised about the market for dollar swaps – derivatives linked to government bond yields – with prices set every day at 11am in New York. As in the case of Libor, the pricing process is dominated by a handful of banks.

                  Similarly, price-setting in the oil market, which is carried out by news organisations such as Platts, has been under scrutiny. Iosco, an international regulatory group, has warned of the risk of the benchmark being “manipulated by the submission of false prices”.

                  The detailed revelations of the Libor scandal will further strengthen the muscle of regulators in their tussle with banks over how much of the derivatives market should be forced on to exchanges or cleared centrally in order to ensure price transparency.

                  Provisions to reform these markets were part of the Dodd-Frank Act passed by the US Congress following the 2008 financial crisis. However, the CFTC has faced heavy resistance from banks over its implementation.

                  The affair will add more broadly to the fallout from the recent trading scandal at JPMorgan, where the bank has so far lost an estimated $5bn on mismatched hedging positions, sharpening regulators’ focus on supervising banks more closely and forcing them to be more transparent.

                  That drive will be all the stronger because of the breadth of the Libor investigations, with regulators from Europe to the US to Japan collaborating to probe close to 20 banks.

                  For Barclays, though, the resonance is particularly strong – and understandably so. The bank has been hit with a string of regulatory and tax investigations on both sides of the Atlantic. It has been fined in the UK for misreporting trading transactions and providing poor advice, and in the US for breaching sanctions on the financing of repressive regimes.

                  Earlier this year the UK government stepped in to block Barclays from implementing two “highly abusive” tax schemes that could have cost the Treasury £500m, adding to long-running questions about its tax structuring.

                  And then there is the controversy around Mr Diamond himself. At a recent annual shareholder meeting a third of shareholders voted against last year’s pay report, after it emerged that Mr Diamond had received close to £25m in total remuneration, including a controversial “tax equalisation” payment of nearly £6m.

                  Amid all the torrid news of recent months, Mr Diamond has continued to stress his insistence that Barclays cares about “citizenship” – a claim critics say sounds ever more hollow.

                  Within the past 48 hours he repeated his mantra in a letter to Andrew Tyrie, head of the House of Commons’ treasury select committee, the body to which he will have to explain himself in the coming days or weeks. “I am determined that Barclays plays its role as a full corporate citizen, acting properly and fairly always, and contributing positively to society in everything that we do,” Mr Diamond wrote.

                  Whether he will be the man to see that mission through depends now on an increasingly anxious shareholder base – amid catcalls from an increasingly critical government – being prepared to give him another chance.

                  It is more than three years since Fred Goodwin was removed as RBS chief executive and less than one since Mr Diamond told Mr Tyrie’s committee that “the period of remorse and apology” by banks was over. The events of recent days have put a question mark over that claim. He has had to issue a public apology and is facing another grilling from the committee.

                  Mr Diamond has said he does not intend to resign. But if he is forced to go it will send yet another shot across the bows of all bank bosses, especially those at other institutions implicated in the Libor scandal.

                  Such a scenario might assuage an angry public. Whether it addresses the underlying problem is questionable. Sir Mervyn King, governor of the Bank of England, has called for “a real change in the culture” of banking which he said had to go beyond issues of personnel.

                  “There’s no point in thinking if one or two people disappear, you’ve solved the problem,” he said yesterday. “If the structure remains the same, other people will come along and behave the same way.”

                  Greek lenders eye Emporiki

                  Posted on 29 June 2012 by

                  Crédit Agricole has received three expressions of interest in Emporiki Bank from local lenders after putting its lossmaking Greek subsidiary up for sale in a move that signalled waning confidence in the country’s future in the eurozone.

                  Greece’s three biggest lenders – National Bank of Greece, Alpha Bank and Eurobank EFG – indicated they were ready to make competitive offers for Emporiki provided they could get approval from the Hellenic Financial Stability Fund, an international rescue facility for the country’s banking sector, two banking sources said.

                    Crédit Agricole in Paris declined to comment.

                    The decision to sell Emporiki, Greece’s fifth largest bank by assets, comes as a blow to the new coalition government that took office last week pledging to keep the country in the eurozone and turn its economy around by 2014.

                    Crédit Agricole invited local banks to submit offers for a majority stake in Emporiki earlier this month as fears mounted of a run on Greek banks, according to one source.

                    Depositors withdrew more than €10bn ahead of the June 17 general election, although €2bn has since returned, according to finance ministry officials.

                    Potential bidders for Emporiki have already asked the HFSF for permission to use part of the €18bn of capital disbursed to the country’s four largest lenders in May as bridge capital to raise their capital adequacy ratio to 8 per cent so that they can regain access to European Central Bank funding.

                    The HFSF is expected to hold discussions next week with bidders on details of their offers, one source said.

                    But a decision is not likely to be taken until Greek banks are fully recapitalised with a further transfer of €23bn-€25bn from the European Union and International Monetary Fund. Credit Agricolehas already taken measures to limit its exposure to Greece – the largest by a European bank – by transferring ownership of Emporiki’s operations in Romania, Bulgaria and Albania to the Paris-listed and mutually controlled bank in France, a move designed to soothe concerns of depositors in those countries.

                    It followed a similar path in Argentina a decade ago, suddenly ending transfers to three local Argentine banks that were taken over by the state-owned Banco de la Nación.

                    Crédit Agricole has spent more than €5bn since 2006 on acquiring full control of Emporiki and strengthening its capital base, but reduced its funding lines to the bank to €4.6bn from €11.4bn a year ago.

                    Additional reporting by Scheherazade Daneshkhu in Paris

                    Debt fears temper Europe euphoria

                    Posted on 29 June 2012 by

                    As rallies go, this was impressive. Friday’s rebound in European equity markets marked the biggest one-day gains this year for blue-chip stocks. Investors pumped money into equities, peripheral eurozone bonds and the euro as they gave their initial blessing to an EU summit outcome that delivered more than hoped.

                    In short, investors welcomed plans to give the European Central Bank direct supervision of eurozone banks, the activation of crisis support for Spain and Italy through the eurozone rescue funds buying bonds and the move to waive preferred creditor status for these funds in holding Spanish debt.

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                      Investors also applauded allowing a direct capital market injection for Spain’s banks via the European Stability Mechanism, the permanent, successor bailout fund to the European Financial Stability Facility – a positive step, say many, that should act as a circuit breaker between banks and sovereigns.

                      Set against that, though, were concerns over the time it might take to create the single supervisory mechanism for the banks, involving the ECB. There were question marks over whether seniority would be waived for Italian bonds.

                      And, despite the strongest daily rally of the year for many markets, there remained nagging doubts that the proposals, hatched in the early hours of Friday, really amounted to anything resembling a “silver bullet” to resolve the debt crisis.

                      Alan Wilde, head of fixed income and currency at Barings, says: “Will the rally last a day, a week or be more permanent? The plans were the right first step, but there is a lack of detail that could start to worry the market.”

                      Didier Duret, chief investment officer at ABN Amro Private Banking, says: “This is a political milestone. The decisions are good and laying a road map. I am particularly impressed with the way they want to recapitalise the banks.

                      “This has the potential to bridge the confidence gap between the markets and the EU leaders. But it is too early to decide whether to increase exposure to the peripheral markets.”

                      Arif Husain, director of European fixed income at AllianceBernstein, is more blunt. “I am optimistic, but not optimistic enough to increase my exposure to the periphery.”

                      Critically, expectations had been lowered substantially prior to the summit, which goes some way to explaining the strength of the rallies in European equities, Italian and Spanish bonds and the euro-dollar exchange rate, say investors.

                      The decisions caught some market participants on the hop, particularly those who had increased positions in haven assets, such as German Bunds and UK gilts, before the two-day summit started.

                      “It’s the right thing to do but it is only likely to come into force in 2013, because getting the ESM to inject directly in to the banks is only feasible once the single bank supervisor is in place, which will take time,” says Philippe Bodereau, head of European credit research at Pimco.

                      Mr Bodereau welcomes the decision to use the ECB as a single regulator, as the central bank has in the past proven to be averse to imposing haircuts on private bond investors “because the ECB has a lot of skin in the game lending to banks”.

                      While many of the details of the plan are still to be fleshed out, some investors say it is significant that the EU has listened to concerns of investors and decided not to make money channelled to Spanish banks via the ESM rank as senior to that of private bondholders. However, they point out that the move at the moment only appears to apply to debt lent to Spanish banks via the ESM.

                      One investor says the fact that “the remaining stigma and conditionality” of accepting money from the EU has been taken away is “extremely powerful”.

                      However, investors say the measures announced seem to offer more to bank investors than sovereign bond investors. Private bondholders say they are wary of listening too much to the political rhetoric, pointing out this is only one step towards solving eurozone woes.

                      Many investors remain uneasy as a result of the private sector involvement agreement signed with Greece earlier this year, which forced them to accept heavy “haircuts”, or losses, on their debt and left them subordinated to European bodies such as the ECB.

                      Marie-Anne Allier of Amundi says the moves announced by European leaders were positive but cautions about reading too much into the rally, pointing out that trading volumes have been thin and yields on Spanish and Italian debt have recovered to end of May levels only. “The bigger winners today were Ireland and Portugal, where yields are now back to levels not seen in the last six to 12 months.”

                      Mr Bodereau says: “The only way the market rally is sustainable is if they [eurozone leaders] can come back with more concrete detail of how it is going to work.

                      “I don’t think this is anywhere close to a permanent solution but it’s a better short-term fix than we had expected.”

                      Christopher Drennen of BNP Paribas says: “We have a paper that on the surface shows leaders had a good discussion and arrived at a consensus on some of the complex issues but the proof will be in the pudding. There is much detail to be fleshed out as well as the definition of time scale … but it is a step in the right direction and a public acknowledgment that eurozone leaders understand the issues and have laid a down a clear statement of aspiration.”