Barclays and the Too-Big-to-Jail Myth

We have examined Barclays on a number of occasions here in Financial Regulation Matters, with a number of posts focusing on the Bank’s dealings with Qatar at the height of the Crisis. The approach taken by Barclays – to deal with Qatar for emergency funding during the height of the Crisis rather than seek Governmental support – has been the subject of a number of investigations since and has brought a number of regulatory bodies into the picture. In today’s post we will examine the interconnecting dynamic that exists between a number of British regulators and the economic, political, and societal factors that affect their ability to effectively regulate. We will not revisit the developments between Barclays and Qatar in any great detail here, as it has been covered before in the blog and by the business media. Rather, we will focus on developments detailed in today’s business press that suggest that the Bank of England, via its Prudential Regulation Authority body, argued to prosecutors at the Serious Fraud Office that criminal charges brought against the Bank ‘could destabilise Barclays’.

The obvious question to ask on the back of this news is whether intervening in such a manner is appropriate. A number of prominent onlookers (including Professors Prem Sikka and Emilios Avgouleas) have commented today that today’s revelations demonstrate regulatory ineffectiveness, ultimately suggesting that such dynamics only serve to continue such destructive practices (referring to too-big-to-jail). According to the Financial Times, the BoE’s top banking supervisor spoke with David Green, the then-Director of the SFO, and warned that a criminal prosecution would result in ‘unpredictable consequences’ for the bank and, therefore, the sector. It is important to note that the source of this revelation has not been identified and that all parties concerned are refusing to comment as of yet, but the implications are extraordinary. The Financial Times continue by making the point that Barclays was charged by the SFO anyway, with there being very little effect to the position of the Bank as a result. This then brings into question the concept of using fear to lobby on the behalf of the regulated entities.

Admittedly, that concept sounds conspiratorial. The official understanding of the concept is much more subtle, with then-Deputy of the Bank of England Andrew Bailey – now in charge of the Financial Conduct Authority – explaining in 2014 that regulators around the world (meaning US regulators mainly) need to put their ‘cards on the table’ before penalising regulated entities so as not to cause systemic risks. This was the reasoning behind George Osborne, then-Chancellor of the Exchequer, writing to the US Federal Reserve to ‘express concern’ over the impact of charges against British-based Banks like HSBC. There are perhaps two schools of thought in this instance. One may suggest that regulators need to be concerned with systemic issues to avoid a repeat of the Financial Crisis and are justified, therefore, in considering the impact of large penalties against important entities within a given sector. This makes sense. However, there is an issue with the application of that approach.

If we consider the actions of the FCA regarding the release of an investigative report into the conduct of RBS (a majoritively state-owned Bank), then the intervention of the regulator to stop the publication of that report takes on a different meaning in light of today’s suggestions. The implications of understanding decisions from within this too-big-to-jail lens means that systemically-important financial entities can transgress without damaging consequences. Regulators, wary of systemic repercussions, will intervene on the regulated entities’ behalf. Whilst the case of Barclays may not necessarily be directly applicable, it is telling that there was very little effect to its position as a result of the prosecution (which has since been scrubbed). In reality, RBS has continued on pace through the GRG scandal. HSBC is surviving just fine irrespective of massive fines. There is enough evidence to suggest that penalties can be exacted (let us just stick with financial penalties for the time being) without there being a systemic risk. If we accept that to be true, then a reality comes to light which is a difficult one to accept, perhaps. That reality is that financial regulators protect the regulated entities, not the victims of their crimes. The rationale for that position is complicated however. Who is to say what the dominating factor is in a regulator’s decision-making process, but the pattern is certainly one of perpetrator-first, rather than victim-first. Perhaps, the rationale is irrelevant. The impact remains the same, and that impact permeates the economic cycle so that in good times the perpetrator is prioritised, and in bad times the perpetrator is prioritised. Perhaps that is a systemic reality that explains the majority of decisions that take place – the system is the most important aspect. That understanding fundamentally changes the concept of ‘systemic importance’.

Keywords – financial regulation; banking; UK; Business; @finregmatters