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.