Barclays’ Manipulation of London Interbank Offered Rate

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Organizations strive to make maximum profits to improve their financial position. In some instances, organizations may engage in unethical practices to make extra income or influence the public image of the company. However, ethical practices dictate that the organizations should engage in ethically acceptable practices. Various regulations ensure that organizations engage in ethical business practices. Therefore, organizations should engage in unethical business practices at their own risk. Organizations face the risk of stiff penalties or the wrath of discontented consumers should they engage in unethical practices.

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However, these risks do not deter organizations from engaging in unethical business practices as long as the practices would reap them additional income or protect their status quo. Barclays is one of the multinational corporations that has been at the center of an ethics scandal. Barclays provided wrong financial information to manipulate the London interbank offered rate (LIBOR). This was amid the 2008 Financial Crisis. Manipulation of the LIBOR enabled the bank to make vast sums of money. The ultimate discovery of the unethical practice made American and British regulators impose a penalty of over $450 million on the bank (Enrich and Munoz para 2).

LIBOR is a financial tool that shows the interest rate with which banks are willing to lend each other Eurocurrency. The British Bankers Association (BBA) compiles the LIBOR daily. On the other hand, the Euro Interbank Offered Rate (EURIBOR) is the rate at which ‘Euro interbank deposits are offered by one bank to another prime bank within the European Monetary Union zone’ (Kenyon and Stamm 62).

Several loan contracts use the LIBOR as a benchmark for determining interest rates (Kenyon and Stamm 62). LIBOR affects the interest rate on a student loan, mortgage. Usually, the interest rate of the loan is set to the LIBOR with the financial institution adding a few percentage points. Futures contracts also depend on the LIBOR. The LIBOR is also a critical component in the calculation of the level of stress of any financial market.

LIBOR and EURIBOR ultimately affect the financial position of any financial market. LIBOR affects financial assets that are worth trillions of dollars. Therefore, providing wrong financial information in calculating LIBOR may have devastating effects. Conversely, LIBOR may enable a financial institution to reap huge incomes directly or indirectly. However, there are other benchmarks for interest rates. The LIBOR is the most dominant benchmark for interest rates; private parties use the LIBOR as a benchmark for interest rates voluntarily (Murphy 4).

In calculating the LIBOR index, the BBA throws discounts on the four highest and for lowest responses. This makes it hard for an individual financial institution to manipulate the LIBOR. Providing wrong information with a view of influencing the LIBOR index may not yield the desired outcome by financial institutions. Since the BBA determines the LIBOR using the average value from the responses of financial institutions, it is hard for an individual financial institution to influence the value of the LIBOR index significantly.

Barclays admitted that it provided wrong responses to affect LIBOR for its ulterior motives. Barclays provided wrong information on US dollar LIBOR and EURIBOR on numerous occasions between 2005 and 2008. Barclays provided wrong survey responses to benefit the company’s position in derivate markets. This was in violation of Principle 5 of FSA’s principle for business. LIBOR and EURIBOR submissions should not take into consideration a bank’s position in derivative markets (Murphy 4).

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LIBOR submissions affect how the media’s perception of a certain bank. This forced Barclays to provide wrong survey responses to protect the company’s image and reputation. Barclays was mainly concerned about the liquidity issues during the financial crisis. During the financial crisis, the media noted that Barclays submitted low LIBOR rates that did not correspond to market conditions. The media speculated that Barclays had a liquidity problem. This tarnished the image of the company prompting the organization to provide LIBOR submissions that would protect the company from the negative publicity (Murphy 4). Therefore, Barclays provided relatively high LIBOR submissions during the financial crisis to portray that it did not have liquidity problems.

In addition, Barclays did not have adequate risk management systems for its LIBOR and EURIBOR submission process (Murphy 4). The lack of an efficient risk management system aggravated the extent of the bank’s misconduct. The company put in place an efficient risk management system in 2009 after engaging in financial misconduct for several years (Murphy 4). Thus, Barclays deliberately refused to set up a risk management system that would have reduced its misconduct.

Barclays acted alone in providing wrong survey responses. This did not have a significant effect on the LIBOR rate due to BBA’s formula for calculating LIBOR. However, Barclays also tried to collude with other banks to affect LIBOR. This method has the possibility of affecting LIBOR by a greater magnitude (Murphy 4). In doing so, Barclays breached the UK’s Financial Services Authority (FSA) Principles for Business, which necessitates businesses to engage in appropriate business practices. Barclays’ misconduct threatened to lead to the loss of integrity of LIBOR. This would have devastating effects on the activities of financial markets.

The FSA imposed a penalty of £59.5 million on Barclays for its attempt to manipulate LIBOR and EURIBOR. This was due to the potential of the misconduct hurting the financial markets of both the UK and other international financial markets. In addition, the Commodity Futures Trading Commission imposed a fine of $200 million on the bank for its misconduct. Since the US derivative markets use the LIBOR, Barclays’s manipulation of the LIBOR also affected the US financial market. This would be a violation of US laws. Therefore, the United States Department of Justice imposed a fine of $160 million.

Barclays did not submit correct LIBOR and EURIBOR during surveys. The company did not have the integrity that is necessary for accounting practices. Manipulating LIBOR and EURIBOR did not portray the correct image of the company to the public. EURIBOR and LIBOR submissions of the bank during the financial crisis did not fit in with the values of other banks. Barclays provided wrong LIBOR and EURIBOR submissions to show that they did not have liquidity problems. Therefore, Barclays deliberately fooled the public. This contradicts the professional ethics of accounting.

Reporting of financial information is crucial to investors, customers, business partners, and other agencies that use the information to make decisions. Companies use their financial reports to portray their philosophy and activities. Therefore, companies should portray their correct image in the financial reports. Various regulations ensure companies engage in ethical practices. Companies and company executives who engage in unethical practices face the risk of tough punishments. Strengthening of regulations framework and enforcement reduces the probability of companies engaging in financial malpractice (Brenkert 88).

However, tough punishments and increasing enforcement of relevant regulations do not deter companies from engaging in financial malpractice. Truthfulness of financial reports depends more than the activities of individuals within the organization. Regulatory bodies should not rely on individual players within the industry for enforcement of professional ethics. The Barclays case shows that companies are liable to engage in unethical conduct despite the efforts of various regulatory bodies to take measures to ensure that companies engage in ethical activities. To prevent the problem, relevant authorities should use a more comprehensive approach (Brenkert 89).

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Businesses should ensure that they have a high level of transparency. Transparency of an organization enables the company to gain the trust of the public. Trust is one of the important aspects of any business organization. It provides a favorable environment for organizations to thrive. In addition, for an organization to gain the trust of the public, the organization must use the appropriate means of reporting its activities (Murphy 2012).

An organization should use highly competent people or systems to ensure that it gains the trust of relevant parties. Barclays betrayed the trust of the public by providing inappropriate LIBOR and EURIBOR submissions. This affected financial markets negatively. Barclays’s activities threatened to reduce the trust that people had in LIBOR and EURIBOR. This would affect the financial markets of the UK and other financial markets that depend on the LIBOR to fix interest rates (Brenkert 89).

LIBOR and EURIBOR are very important financial tools. The financial tools control hundreds of trillion dollars. There are various measures to ensure that LIBOR and EURIBOR are accurate. However, these measures did not deter Barclays from engaging in financial malpractices that affect LIBOR and EURIBOR.

Works Cited

Brenkert, George. Corporate integrity and accountability. London: SAGE publications, 2004. Print.

Enrich, David, and Sarah Munoz Schaefer. “Rate Scandal Set to Spread”. Wall street Journal. 2012. Web.

Kenyon, Chris, and Roland Stamm. Discounting, libor, CVA and funding: Interest rate and credit pricing. London: Palgrave Macmillan, 2012. Print.

Muphy, Edward V. “LIBOR: Frequently asked questions”. Congressional Research Service, 2012. Web.

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BusinessEssay. (2022, November 26). Barclays' Manipulation of London Interbank Offered Rate. Retrieved from https://business-essay.com/barclays-manipulation-of-london-interbank-offered-rate/

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BusinessEssay. (2022, November 26). Barclays' Manipulation of London Interbank Offered Rate. https://business-essay.com/barclays-manipulation-of-london-interbank-offered-rate/

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BusinessEssay. (2022) 'Barclays' Manipulation of London Interbank Offered Rate'. 26 November.

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BusinessEssay. 2022. "Barclays' Manipulation of London Interbank Offered Rate." November 26, 2022. https://business-essay.com/barclays-manipulation-of-london-interbank-offered-rate/.

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