Barclays reports big fall in UK banking profits and big surge in prudence

I am grateful to City AM for reminding us that yesterday Barclays revealed a 55% tumble in its UK banking profits. Meanwhile its liquidity and capital surged to meet new regulatory requirements. It is now 20 times leveraged – the level banks averaged in the 1990s before Labour’s crazy experiment with more borrowing – down from 28 times.

Barclays has more than met the new need to hold more cash and to have more capital. It holds £650 million extra liquidity and has cut the size of its balance sheet. As the weaker state owned banks try to go the same way we should expect more trouble for people and businesses trying to borrow money, less economic growth, and higher prices for banks’ services.

All this is the direct result of disastrously lax regulation in the noughties, followed by much tougher regulation now we are in a financial hole. Boom and bust regulation is reinforcing boom and bust money policies.

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15 Comments

  1. Lola
    Posted February 17, 2010 at 10:36 am | Permalink

    Barclasy. An object lesson in how to refinance a bank without a sniff of state subsidy – QE excepted.

  2. William Grace
    Posted February 17, 2010 at 10:51 am | Permalink

    Yippie for Barclays! They have done this by screwing small businesses like mine! As well as screwing with my Credit Card!
    Yeah gotta support a bank that screws its customers!

  3. waramess
    Posted February 17, 2010 at 11:06 am | Permalink

    Still not adequate. Back in the '60's when the Clearing Banks were "undoubted" the ratio was 7:1, moving to 101 by the early '70's. This was a ratio that the markets felt comfortable with and nothing to do with the Bank of Englands capital adequacy requirements

    Ths latter ratio implied that for every £11 "lent", £1 of risk capital was held as a buffer for bad debts. Pretty conservative.

    To have a 20 times leverage means that for every £21 lent a buffer of £1 is held for bad debts. Still pretty racy given the present climate.

    We have permitted the banks to grow too big and neglected to watch their capital base. This was partly due to the Bank of Englands decision to micro manage the banks' capital requirements based on the quality of their assets. Always bound to end in tears

    Bringing the capital base back to 10:1 will result in the returns on capital shrinking and will reduce the argument for big banks.

    Leaving matters as they are will be to invite another banking crisis the next time things get out of control.

  4. Mark
    Posted February 17, 2010 at 11:14 am | Permalink

    It's good that Barclays have returned to something like a sane balance sheet. If other banks had managed to do likewise, we would no longer have a financial crisis, and savers' interest rates and bank margins and lending practices could return to normal. However, I can't help feeling that even Barclays still has a long way to go before everything is resolved, because there are going to be a lot more writedowns in the pipeline – and I think they know it.

    The other element of good news from Barclays is their determination to have a voice in the new regulatory environment. Of course, their opinion needs to be watched for self-serving self interest, but they probably have a rather better understanding of the necessary than say Vince Cable or Michel Barnier (why do I read that as barmier??).

  5. Sally C.
    Posted February 17, 2010 at 11:26 am | Permalink

    The inconvenient truth is that Barclays made most of its profits from its inhouse casino, known as BarCap. The problem with that is that Barclays is consequently encouraged to make larger amounts of capital available to BarCap so that it can take bigger and bigger bets. This leaves us, the UK taxpayer, potentially exposed to larger and larger losses down the road. It is not acceptable for banks with very large investment banking arms to expect a bailout from the UK taxpayer. It makes them reckless with our money. This is the whole point behind the Volker plan. Another question is whether 20 times leverage constitutes prudent banking?

  6. Robert K, Oxford
    Posted February 17, 2010 at 12:33 pm | Permalink

    This crazy regulatory approach also creates an uneven playing field for the banks, like Barclays, that did not mess up so badly that they needed bailing out by the state. They are having to face against state-subsidised competitors, when the moral thing to have happened was for the failed banks to be broken up and the constituent bits either shut down or sold to their more successful rivals. The mess that Brown has created means that the taxpayer will be haunted by RBS et al for the next decade.
    Incidentally, I saw St Vincent de Cable being quoted the other day saying that it was right that John Varley at Barclays had not taken a bonus because although Barclays had not been bailed out by the state Barclays was so big that if it ran into trouble it would have to be rescued. What sort of nonsense is that? Surely the answer is for the government take urgent steps to break up the zombie banks and say that it will never participate in another bailout.

  7. Ian Jones
    Posted February 17, 2010 at 12:36 pm | Permalink

    Not to worry, our mortgage market is being funded by the ECB through the Spanish bank Santander. The fact it doesnt mark to market its investments and so hasnt seen losses on the same investments as the other banks is neither here nor there…….

  8. dimwit
    Posted February 17, 2010 at 1:52 pm | Permalink

    May I suggest a modest wheeze for bombproof bank regulation which would prevent any repetition of the distressing events of the past couple of years? It is to make all banks follow the example of Hoare's Bank, which is NOT a limited liability company and in which the directors are personally liable for every penny they possess if it goes down. No problem with junk loans at Hoare's, I bet!

  9. English Pensioner
    Posted February 17, 2010 at 5:33 pm | Permalink

    Shows what Lloyds should have done instead of being tempted by the government to take over HBOS. But then Barclays had strong directors and a Chef Executive who knew their own minds and weren't obsessed by size as in the case of both RBS and Lloyds.

  10. StevenL
    Posted February 17, 2010 at 5:49 pm | Permalink

    As someone who recently bought a monkey's worth of Barclays shares, I don't think the government have gone anywhere near far enough when it comes to writing me cheques with my own money.

  11. mikestallard
    Posted February 17, 2010 at 5:57 pm | Permalink

    Yesterday I walked round King's Lynn. there are some huge buildings including a vast perpendicular Church and a Council House and jail. All along the road are huge houses which are easily as big as Amsterdam. All were built before the Reformation.
    Why? Because trade was free and the merchants sent ships to the Baltic under the Hanse.
    The government had nothing to do with it.
    There could be a moral there….
    At the end of the day, what do politicians know about banking/trade/business? They are after votes not money! (Present company always excepted, of course!)

    • Mark
      Posted February 17, 2010 at 7:41 pm | Permalink

      JR is still after votes. The difference is that he has earned them by representing the interests of the people.

  12. Matthew Reynolds
    Posted February 18, 2010 at 11:59 am | Permalink

    My solution is to learn from what the Swedes did with their banks.Just get the IMF & World Bank to do a 100% audit of our banks with nothing hidden or covered up so that the full scale of the problem is revealed under the glare of total transparency.Then print enough money to get banks balance sheets up to a level needed to provide a cushion and to have enough lending to get an economic upswing going.That money should face a 2% interest charge if there is inadequate lending to small business and if mortgage applications do not increase much faster.With greater levels of capital and greater transparency there would be the scope and the confidence to lend.In the boom times banks should hoard more cash to sustain lending during a recession.If asset prices accelerate too quickly the temporary credit restraints should be introduced until the situation moderates.Likewise if deflation threatens then money should be printed to buy assets to avert a depression.In the boom years the inflation target should be 1% to stop too much money chasing too few goods and in a recession the target should be 4% to stop over-kill causing a depression.Inflation should be measured on RPI-x for the sake of greater accuracy and MPC members should be appointed for seven year fixed non-renewable terms to ensure stability & continuity.Also without the prospect of reappointment MPC members could not be coaxed into lower interest rates at politically suitable times and could keep fighting inflation instead.The FSA should go and the powers moved to the Bank of England.We need a streamlined system with a proven record of success since the 1690's – not an unwieldy set up that failed to prevent a bank run after Northern Rock.

    This proves that we need a better framework for monetary policy and financial regulation with stability at its heart.

  13. Silvia
    Posted February 18, 2010 at 9:40 pm | Permalink

    I am always excited to visit this blog in the evenings.Please churning hold the contents. It is very entertaining.

  14. Lindsay McDougall
    Posted February 19, 2010 at 3:25 am | Permalink

    Barclays refused to accept UK government aid, although they do acknowledge that the market's confidence in them was low in January 2009, and that the government's Asset Protection Scheme did calm things down.

    Given this, why do HM Government, the Bank of England and the EU try to impose the same restraints on Barclays as they do on Lloyds and RBS? These governing bodies should be able to DISCRIMINATE between an adequately run bank and FAILED INSTITUTIONS.

    A much maligned word is 'discrimination'. Any thinking person should be allowed to discriminate between failure and success, and to form their own estimation of which companies and people are likely to succeed. All that can be reasonably demanded is that initial prejudices should be modified after rational thought.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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