Description
In the midst of the financial crisis, Barclays (the world's 4th largest bank by assets) is forced by UK regulators to raise more capital. Should it take up the UK government's offer to invest, or take funding from investors from the Middle East? Students may price the two deals to determine which is more expensive, and must decide whether avoiding the constraints of government ownership is worth the extra cost.
Learning objective:
The class begins with a discussion of why, if the bank is required to raise capital, none of the instruments being offered look like equity? Why do regulators force banks to hold a certain amount of equity against their assets? Why do these instruments (which are more like preference shares and convertible debt) count as equity? Should they? We then discuss the pros and cons of accepting government versus private investment. Students generally conclude that other things being equal, it would be better to avoid government ownership, leading nicely to a discussion of... What is the relative cost of the two deals? Students must lay out the cash flows to the government preference shares versus the ""reserve capital instruments"" (debt) instruments, and the ordinary shares versus the ""Mandatory convertible notes"" (convertible debt) that the government and private deal will entail, respectively. The private deal involves granting various warrants for free, and these must also be priced using option pricing. Conclusion: Case teaches: Why is bank capital necessary? What sort of instruments do banks use as capital? How should we price them? What are the costs for a bank of being state-owned?
Barclays Bank and Contingent依情况而定的 Capital Notes, 2012
In 2012, regulatory changes following the financial crisis mean that Barclays Bank is faced with the need to raise large amounts of capital in order to comply with increased capital requirements, tightening rules as to the "quality of capital," and increased risk weights for its capital markets assets. The bank is contemplating offering contingent capital bonds, which would act like debt during "normal times" but would convert to create capital should the bank hit a "triggering event." How should these instruments be designed? Can they be attractive for the bank and for investors?

Barclays and the LIBOR Scandal
In June of 2012, Barclays plc admitted that it had manipulated the London Interbank Offered Rate (LIBOR)-a benchmark interest rate that was fundamental to the operation of international financial markets and that was the basis for trillions of dollars of financial transactions. Between 2005 and 2009, Barclays, one of the world's largest and most important banks, manipulated LIBOR to gain profits and/or limit losses from derivative trades. In addition, between 2007 and 2009, the firm had made dishonestly low LIBOR submission rates to dampen market speculation and negative media comments about the firm's viability during the financial crisis. In settling with U.K. and U.S. regulators the firm agreed to pay $450 million in fines. Within a few days of the settlement, Barclays' CEO, Robert Diamond, had resigned under pressure from British regulators. Diamond blamed a small number of employees for the derivative trading-related LIBOR rate violations and termed their actions as "reprehensible." As for rigging LIBOR rates to limit market and media speculation of Barclays' financial viability, Diamond denied any personal wrongdoing, and argued, that if anything, Barclays was more honest in its LIBOR submissions than other banks-questioning how banks that were so troubled as to later be partly nationalized could appear to borrow at a lower rate than Barclays. This case explains why LIBOR was an essential part of the global financial market, the mechanism used to establish the rate, and what Barclays did wrong. The case allows for an examination of: i) the consequences of violating the trust of market participants, ii) cultural and leadership flaws at Barclays; iii) the challenge of effectively competing in a market where systemic, and widely understood, corruption is taking place, iv) the complicity of regulators in perpetuating a corrupt system; v) what might, or might not, be effective remedies for the systemic flaws in LIBOR