Barclays faces a criminal trial in the UK. Last week it was RBS. 

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Now, it’s the UK’s second-largest bank Barclays’ turn to face the music. A week ago, it was the UK’s third-largest bank, state-owned Royal Bank of Scotland, that faced one of its biggest scandal yet after whistle-blowers accused the bank of systematically forging customer signatures. RBS also faces the prospect of a multi-billion dollar fine for the way it sold residential mortgage-backed securities during the lead up to the Financial Crisis.

On Monday, the UK’s Serious Fraud Office (SFO) announced that it was charging Barclays for a second time over a deeply suspicious £2.2 billion ($3 billion) loan it issued in 2008 to Qatar. To avoid a government bailout, Barclays took a £12 billion loan from Qatar Holdings, which is owned by the state of Qatar. Under that deal, Barclays loaned £2.3 billion back to Qatar Holdings, which allegedly was then used to buy shares in Barclays. If true, it would amount to “unlawful financial assistance,” the SFO says.

Barclays is the first British bank to face a criminal trial in the UK related to its conduct during the Financial Crisis. The fresh charge of “unlawful financial assistance” comes after charges were brought against Barclays’ holding company and four former executives last July.

Founded in 1690, Barclays is one of the world’s oldest banks. As the Financial Times notes, the original lender was established on a bedrock of honesty, integrity and plain dealing — a reflection of the sober values of the Quaker families that founded the bank. Today, things could not be more different. The bank now boasts one of the longest rap sheets of any bank in Europe, which — given the pedigree of the local competition, including Deutsche Bank, HSBC, RBS, UBS, BNP and Credit Suisse — is no mean feat.

The myriad crimes for which it has been fined in the last ten years include manipulating electricity prices in the US and conspiracy to rig Libor rates, foreign exchange rates and a benchmark interest rate used in swaps and derivatives. But it’s the loan to Qatar that could end up doing the most harm. Lending money to bank customers so that they can then buy shares that the bank issues to raise capital is fraud of the most blatant sort.

By choosing to contest the charges Barclays runs the risk, if found guilty, of being stripped of key banking licenses. According to the FT, the fact that it’s willing to run this risk means it “must reckon no regulator would take such drastic action as a result of a one-off event in the exceptional circumstances of the financial crisis.”

Considering the paucity of punitive actions taken against the world’s biggest banks or their top executives — beyond the hundreds of billions they’ve been charged in fines, the burden of which was ultimately shouldered by the banks’ shareholders — you can hardly blame Barclays for calling the SFO’s bluff.

Judging by the reaction of the bank’s shares, the markets seem to agree. The stock ended Monday 0.63% higher and was down a barely perceptible 0.17% on Tuesday.

But the long term trend is a lot less propitious. In the last two years Barclays has under performed the Stoxx Europe 600 Banks by an impressive 16% — an achievement only bettered by one other European lender, the perennially afflicted Deutsche Bank. Its stock has dropped 8% since January 26 alone. In 2017 it tumbled 9% — the most of any large European lender — after three consecutive quarters of disappointing trading results raised questions about managers’ ability to revive earnings at the investment bank.

Now, Barclays has to find a way of hiving off its investment bank in order to satisfy new regulations aimed at insulating day-to-day retail customers from problems that may emerge in risk-prone investment divisions. Unlike their counterparts in the EU and the US, and much to the chagrin of banks like Barclays, the UK government and Bank of England seem serious about ring-fencing investment banking activities (derivatives, debt and equity underwriting) from high street bank operations (mortgages, retail and small business loans and deposits, overdrafts…).

There is a risk, however, that implementation of the new rules could be disruptive, especially if it coincides with a disorderly Brexit. “As with any big infrastructure project, there is some potential for disruption to everyday activities as new group structures are moved into place and new ways of operating are brought online,” said James Proudman, the Bank of England’s executive director for supervision of deposit takers.

In light of the acute challenges the UK banking industry faces in the next 12-18 months, the chances of Barclays, a global systemically important bank (G-SIB), being stripped of its banking license for crimes it committed 10 years ago in order to avoid being bailed out with taxpayer funds are infinitesimally small. If such a thing were to happen, it would have huge reverberations not just in the UK but across the entire global economy.

Fortunately, stripping the bank of its banking license is not the only way for justice to be served. There’s also the customary practice of punishing the people that actually committed the crime, but this being the banking industry, the chances of that happening are even tinier than infinitesimally small, especially when the accused include John Varley, Barclays’ former CEO, and Roger Jenkins, the former Barclays head of investment banking who was once the highest paid banker in England.

At least a small measure of grim comfort can be drawn from the fact that at long last, former C-suite executives of one of the world’s biggest banks will soon be sitting in the dock. It’s a precedence that’s long overdue. By Don Quijones.

Small-business customers suffered most at the hands of RBS. Read…  Bailed-Out RBS Systemically Forged Customer Signatures: Whistle-Blowers

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