Was Barclays the problem, or was it the business model?

WHEN the world applauds your obituary, as it has the death of Barclays Plc’s global ambitions, it seems you have been doing something wrong.

Barclays’ shares rallied 7.69% on Thursday after the bank announced a sweeping restructuring, the central planks of which are the creation of a bad bank to house impaired assets and, more importantly, huge cut-backs in investment banking.

It all amounts to an end for Barclays’ long-time goal to be a global universal bank, a project fertilised by the ashes of Lehman Brothers but ultimately undone by inadequate profits.

But while investors were quick to work out that the global stage was not the right place for Barclays, perhaps the more interesting questions are about the read-across for other large banks.

Did Barclays’ shares surge because it was bad at being a global bank? Or did they surge because Britain is a bad place for a global bank to call home?

Or perhaps shares in Barclays surged because it is flat out bad to be a global bank.

All three explanations are plausible, and all three have a certain amount of evidence to support them. But the third – that the interests of investors are not well-served by committing capital to the largest banks – is the most compelling.

First, let’s be clear by what we mean when we discuss a global universal bank. This is the idea that a bank that can compete in all major capital markets around the world will enjoy an advantage, if sufficient prominence is achieved, in attracting and serving clients.

The evidence supporting this belief isn’t great, the role-models are few and given to an embarrassing and persistent tendency to bleed capital at unpredictable intervals. After all, global universal bank is what Citigroup attempted for decade after eventful decade.

Barclays, which picked up part of the Lehman Brothers operation after it imploded, said it would shed 7,000 jobs at its investment bank over the next two years, while cutting both investment bank leverage and risk-weighted assets by about half. It also plans to sell retail banking operations in mainland Europe, and will create a “bad bank” to hold US$195bil of risk-weighted assets from Europe and its investment bank.

The bad bank is intended to allow, as it has elsewhere, investors to better grasp both Barclays’ downside and its progress in creating and acquiring better loans and securities.

Retreating from broad swaths of investment banking is a bit more complex. Not only has the investment bank created embarrassment and liability – as in the interest rate fixing scandal – it has done so while requiring huge amounts of capital. At the same time, it has had to pay out considerable portions of the money it does bring in, and, worst of all, shown little sign of reversing those two trends.

That, along with a distressing tendency to make large bonus payments to “key” personnel without ever quite harvesting the promised market rewards is exhibit A for those who argue that Barclays simply wasn’t doing it right.

That’s possible, but in fairness, the vast majority of the mistakes made at Barclays are rife in other large banks, both those that have achieved bulge bracket status and those that have failed at attaining it.

There is also a line of reasoning that says that Barclays, as one of the few large British banks left standing, was brought low by increasing regulation and a hostile political atmosphere. The key issue here is capital requirements, and those are going up not just in Britain but everywhere.

And while Barclays was frequently knocked around in Parliament and the press, it is far more telling that only 76% of its usually quiet shareholders actually backed its 2013 pay report. Those are the bank’s owners speaking, and they were, rightly, not pleased with what they were getting for what they were laying out.

That brings us to my favored analysis: that the business of being a global bank, of using a huge deposit base as a tool to compete in capital-intensive areas of investment banking, can feel like a long-running and elaborate joke at the expense of shareholders.

That this hasn’t escaped the notice of shareholders can be seen in the generally lower premiums they will pay for banks with large investment banking operations. That’s perfectly sensible: those earnings are volatile, come with occasional disasters and a culture in which far too much of the revenue takes the elevator down at the end of the day.

Barclays may have failed, but its ambitions weren’t in its owners’ best interests in the first place.

  • James Saft is a Reuters columnist. The opinions expressed are his own

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