THERE can be little that is more precious to a bank than a reputation for integrity. The revelation that Barclays has paid a £290m fine for “misconduct” with regard to the setting of benchmark interest rates affecting trillions of pounds of financial contracts is a big blow for the bank’s reputation. Cue politicians calling for heads to roll and demands for criminal prosecutions.
Yet the details of the Libor scandal suggest that this goes beyond any one bank. Every bank has multiple reputations with different stakeholders. It is likely that the revelations about Libor will impact Barclays’ reputation most with regulators and clients. But, if Barclays is guilty, so are many others. UBS last year settled with regulators and gained conditional immunity in this affair. The list of those supposedly still being investigated includes many of the big international investment banks. By being first to settle, Barclays and its chief executive Bob Diamond have exposed themselves to extra flak, but this may have limited the size of the fines.
A key question is whether Barclays’ reputation with customers has been affected. The large decline in the share price of Barclays can be seen as an attempt by the market to assess potential future liabilities. Academic research shows that in addition to the cost of fines and settlements, incidents of rule breaches only have significant negative effects on the market capitalisation of firms if customers or shareholders are negatively affected – breaches of, for example, environmental laws have no further effect on market capitalisation. The logic being that firms suffer from a decline in business or a higher cost of capital if the offence is committed against customers or shareholders, but not if it is against third parties. At first glance this might suggest that Barclays will suffer further losses, as some customers may well have been negatively affected by the compromising of Libor. But, given the way that Libor is set, Barclays by itself could not have significantly impacted the level of Libor. This diffusion of blame for the Libor rate fixing means that Barclays’ reputation with its corporate and institutional customers is unlikely to suffer relative to its competitors. This is part of a trend over the past decade in the US and globally where major banks have settled with (primarily US) authorities over issues such as independence of research and mortgage foreclosures, and seen little harm to their reputations with corporate clients. It is perhaps a little disappointing that we are left with the feeling after these repeated settlements and fines that most banks are “no worse than any of the others”.
Indeed, while the Libor scandal has helped to chase the RBS computer problems from the front page, it is possible that the latter will be the one that has a greater impact on the individual bank. The computer problems at RBS hit the reputation of the bank for competence with its customers. Unlike the slightly involved explanations of Libor, the computer glitch has impacted many more customers directly. And blame cannot be spread around the sector as a whole.
This leads us to reputation with regulators. The Libor fixing may have more serious implications for regulation. The setting of Libor was one of the few areas of self-regulation remaining in an increasingly rule-bound financial world. The assumption that reputational concerns and self interest would bind banks to report honestly their cost of funding has been shown to be misplaced. The demands for more onerous regulation are increasing, although it is not clear that the extra rules being mooted will solve cultural problems or excessive risk taking. Once again, it is not just Barclays that is in the frame here, but the entire banking sector. Banks share a common, and increasingly poor, reputation with regulators.
Finally, it is important that UK regulators and politicians do not go too far in their outrage. What is required is judicious regulation to prevent a repetition of the problem and suitable penalties for wrongdoers. There is some pressure from US politicians to add to the “London problem” meme, suggesting that boom time scandals are concentrated in the UK. Yet the present benchmark interest rate fixing scandal also involves Euribor and Tibor, the benchmarks of the Eurozone and Japan, neither market known for “light touch regulation”. The UK needs to maintain its reputation as both a clean and competitive financial hub.
Ken Okamura is a researcher at the Oxford University Centre for Corporate Reputation.