Barclays credit rating outlook downgraded ahead of banking inquiry debate

A leading credit ratings agency today downgraded Barclays’ outlook to negative in the wake of Bob Diamond's resignation and continuing turmoil at the bank.

Moody’s said the departure of Mr Diamond, as well as that of chairman Marcus Agius and chief operating officer Jerry del Missier could lead to the break up of Barclays investment arm – responsible for the majority of the banks profits.

The cut - from stable to negative - comes ahead of a vote in Parliament this afternoon to decide whether to hold a judge-led investigation into the interest rate fixing scandal.

Labour, along with a number of smaller parties, is backing the move but it is opposed by the Government that favours a Parliamentary investigation carried out by a joint committee of both houses.

The Coalition claims that a parliamentary investigation is the best way to get speedy recommendations that can be included in a banking reform Bill early next year.

However opponents point to the failure of the Treasury Select Committee yesterday to ‘score a direct hit’ on Mr Diamond as evidence that only a judge led inquiry can get to the truth of what went wrong at Barclays and other banks.

The man chosen by the coalition to chair the parliamentary joint committee - the chairman of the Commons Treasury Committee, Tory MP Andrew Tyrie - has said he will not go ahead unless there is cross-party consensus. However the Government is expected to find a replacement if he decides he cannot take the role on.

MPs on all sides are expected to be whipped to back the party line in the vote.

Explaining its decision, Moody's said shareholder and political pressures could “lead to broader pressure on the bank to shift its business model away from investment banking and reform perceived failures in its business culture”.

It added: “Although this could have potentially positive implications over the longer term, the uncertainty surrounding such a change in direction is credit negative in the short term.

“In addition, Moody's believes that the bank could be challenged to replace the three senior staff and in particular find a new chief executive who not only has a sufficient understanding of the investment banking business to run Barclays, but also has the credibility and ability to swiftly address the weaknesses that the Libor incident revealed and stakeholders' perceptions of the investment bank.”

Moody's said that Barclays' ratings could come under further pressure if the bank proves unable to restore a stable management structure over the coming months.

Moody's downgrade means Barclays could see its actual rating downgraded in the future, which would lead to higher funding costs for the bank.

This could potentially lead to higher costs for its customers on the accounts, loans or mortgages they hold.

Mr Diamond yesterday admitted that what went on at Barclays in the years between 2005 and 2008 had been “unacceptable” describing the activities of some bankers as “reprehensible”.

He said he was “sorry, disappointed and angry” about what happened but repeatedly failed to say he would wave his bonus – thought to be worth over £20 million.

He added he had only been aware of the rate fixing a month ago.

But Mr Tyrie said elements of Mr Diamond's evidence were not credible.

“I found a number of things he said, taken together, cumulatively implausible. 

Something clearly had gone wrong in Barclays, much bigger than just Libor, and that's why Bob Diamond had to go, and that's why the FSA were already pressing vigorously that there'd been, that there was apparently a breakdown in trust between the regulator and Barclays and why they were very concerned about the quality of behaviour of senior management.“

He said he was reluctant to consider interfering in Barclays' decision regarding Mr Diamond's severance pay.

“I think this is a private company, a private company should take the decision. I don't think it's our job to start telling private companies how to set their pay.”