Anthony Hilton: It's wrong to pillory the regulators for making the banks safer with capital
Barclays is not only still too big to fail but it is also too big to rescue without huge cost
Saturday 27 July 2013
The week got off to a bad start with Secretary of State Vince Cable colourfully suggesting that the Bank of England's zeal in demanding higher capital limits from the banks deserved comparison with the attitudes of the Taliban. He has bought into the argument that pressure on the banks to raise more capital reduces their ability to lend to business.
This is of course complete nonsense, but you have to admire the banking lobby's skill in persuading experienced politicians like Mr Cable that black is white.
A leading city figure, Robert Jenkins, who till recently served on the Financial Stability Committee, pointed out this month that Barclays finances only 2.5 per cent of its lending with capital raised from shareholders. It funds the rest by borrowing. It borrows 97.5p for every pound of risk it takes. The Bank of England had asked that it boosts capital to 3 per cent more or less immediately rather than in a few years' time as already agreed. Its sin, therefore, was to suggest that the banks made themselves a little bit safer just a little bit sooner than planned.
One way the banks could reduce this ratio of equity to loans is indeed by lending less, though even that need not damage lending to business because, as the former chairman of the Financial Services Authority Lord Turner has pointed out, less than 15 per cent of bank lending goes to the business sector of the economy. The small business sector has more money deposited in the banks than it has taken out in loans from them. The bulk of bank lending finances property or various kinds of financial engineering, be it loans for private-equity takeovers or trading financial assets. If the banks feel they have to cut lending, why not do less trading or finance fewer takeover bids.
But there are many other ways that Barclays, for example, could raise its equity. Mr Jenkins, himself a former banker, says it could cut costs; it could pay less in bonuses; it could pay bonuses in newly issued equity; it could sell off some superfluous assets or businesses; or, of course, it could ask its shareholders to subscribe for more.
A drop of just 2.5 per cent in the value of its loans would wipe out 100 per cent of the Barclays equity. Barclays' balance sheet is nearly £1.5 trillion, roughly one year's output of the UK economy, so it is not only still too big to fail but it is also too big to rescue without huge additional cost to everyone. Given that regulators were accused of looking the other way when the financial crisis was building up it is surely wrong to pillory them now they are trying to do the job properly.
Charting the rise of the shopping supermalls
Breakfast on Tuesday with Robert Noel, the chief executive of Land Securities. This remains one of the largest property businesses in the UK, in spite of several years of pruning to refine its focus on two areas – major office developments and large shopping centres.
He has such depth of knowledge about his sector that conversation is full of facts. Did you know that 20 years ago a retailer would expect to need 180 to 200 outlets to cover half the nation but with the growth of massive shopping malls it is down to about 60? Think what that means for all the high streets and 30-year-old retail parks.
Mr Noel says we go out to the shops less often than we used to because of home delivery via the internet so when we do go out we want a more interesting experience and we are prepared to travel for an hour or more. Hence the gravitation towards shopping centres with restaurants, gyms, cinemas, hundreds of shops and protection from the weather.
In an uncertain world Mr Noel thinks the two most certain things are that the internet will get bigger and giant malls will get even more popular, but everything else looks distinctly fuzzy. Because of this he has been selling off the smaller and older shopping malls in his portfolio which he thinks might well be upstaged by a big brother down the road, at which point they will plunge in value.
I wondered who would buy these given that the trends seem to be exactly as he outlined. I hope it is not the fund manager in charge of my pension.
Taxman fails to Bolt the door on Usain's break
Friday evening in the Olympic Stadium for the first time since last year, where one of the star performers was the Jamaican sprinter Usain Bolt. The edge was taken off it a bit by a report from Baker Tilly, the accounting firm, which said generous tax breaks had been put in place to persuade him to appear. Normally the UK has stringent rules around the tax treatment of visiting sports stars, so how has the fastest man on earth outrun them this time, the firm asked.
How indeed. But as Mr Bolt lines up alongside Starbucks, Google and Amazon as a welcome foreign visitor who does not have to pay tax on the money generated here, you do wonder how long before our tax system collapses under the weight of its own inconsistencies.
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