TEXT-Fitch:Barclays libor settlement highlights trading banks' risks

Thu Jul 5, 2012 2:46pm IST

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July 05 - Political, regulatory and reputation risks for Barclays and other major global banks involved in setting Libor have increased due to the resignation of senior figures, settlements with regulators and the on-going investigation into Libor practices, Fitch Ratings says.

The long-term business, financial and credit risk implications are unclear. However, for Barclays, the direct implications, in terms of the size of the regulatory settlements announced last week, are easily manageable given its capital and earnings capacity.

The resignations or intended resignation of Barclays' Chairman, CEO and COO, and the possibility that others may follow, create headline risk and the potential for temporary management dissonance. But Barclays is a large firm with many experienced managers capable of running its various businesses day-to-day.

It is premature to speculate about any change in strategic direction by new senior executives. Fitch's view is that the near-term focus of a new team will be on issues of corporate governance, risk management, operational controls and regulatory compliance. Barclays is already working to enhance the competitive positions and financial contributions of its retail and commercial banking businesses to better balance its investment bank franchise. Barclays has already announced a review of business practices throughout the bank.

Additional impacts include the potential for material litigation expenses and civil settlement costs, and for additional regulatory burdens stemming from on-going parliamentary scrutiny, including yesterday's Treasury Select Committee hearing and forthcoming government inquiries. The potential for a lasting impact to Barclays' franchise from the reputational damage as a result of being first to settle is unclear.

On the regulatory front, the global banking industry has been on a path of much greater regulation for several years now - including Dodd-Frank in the US and the planned ring-fencing of UK retail banks - with the full effect of some additional regulations and standards yet to be determined or implemented. While Barclays is currently in the eye of the storm, as the investigations proceed and the involvement of other banks becomes clearer, its burden is likely to be shared amongst a broader group of banks.

Fitch highlighted these risks in the fourth quarter of last year when we downgraded the ratings of a number of the largest global banks, including a majority of the banks in our Global Trading and Universal Bank (GTUB) peer group. At the time we stated that, in addition to various rating strengths and other risk factors, the complexity of their business models and exposure to fat tail risk make it more difficult to predict and assess the size of losses that could emerge rapidly from unexpected events.

In December, Fitch downgraded Barclays to 'A' from 'AA-', with a Stable Outlook. The impact of the Libor investigation does not currently alter our view on Barclays' or any other GTUB's credit ratings. However, if the investigations or any reputational damage result in a notable and lasting business or financial impact that meaningfully impacts a bank's credit risk profile, Fitch would then reconsider the appropriate rating levels for the affected institutions.

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