Outlook When regulators at the Bank of England decided earlier this year that Barclays and Nationwide should increase their capital buffers to cover at least 3 per cent of their total assets, the two lenders fought back vigorously.
They tried to go around the regulator and lobbied the Treasury and Downing Street directly. "Call off the 'capital Taliban' in Threadneedle Street" was the lobby's demand of ministers.
Antony Jenkins, the Barclays chief executive who presents himself as an ethical reformer after the excesses of the Bob Diamond era, even made a veiled threat to cut off lending to the real economy if forced to meet this new leverage target by the middle of next year.
But the Taliban have got their way. Yesterday Barclays' management emerged from their bunker with their hands raised. Almost £6bn in new equity will be issued, equal to 15 per cent of Barclays' present market capitalisation. And the bank's £1.5 trillion balance sheet will be restructured to make up the rest of the £13bn capital shortfall by June 2014. There was also a commitment from Mr Jenkins that lending to the real UK economy will not be affected by the restructuring.
The share price fell by 5.7 per cent yesterday. But this is likely to be temporary. Other European banks that have been required by regulators to boost their capital over the past year or so have managed to do so without suffering a share price collapse.
Deutsche Bank's shares are up 5 per cent on April when it raised more equity capital, and Credit Suisse shares are 60 per cent higher since it announced a new capital-raising programme in July 2012. Barclays is also likely to find that, when the smoke has cleared, raising more equity gives its value a lift.
That more capital can be positive for a bank's share price is not, in itself, an argument for demanding higher buffers. The primary purpose of the demand is to protect taxpayers from being forced to prop up a bank. Yet the robustness of European bank shares after recent capital calls does undermine the argument of bank executives that shareholders don't want more capital. The truth is that it is bank executives, rather than investors, who don't like well-capitalised lenders. This is because their bonuses are tied to return on equity. The smaller the equity, the bigger the bonus (for a given level of profit).
Mr Jenkins was still stressing his desired return-on-equity target yesterday – more than 11.5 per cent by 2016. But double-digit returns on equity for any bank are incompatible with a safely capitalised institution, because they imply unacceptably low buffers.
Bear in mind, too, that after this equity sale Barclays assets would only need to slide in value by around 3 per cent to leave taxpayers potentially exposed once more. When a bank has a balance sheet equal in size to the entire UK economy, that's no joke. Both the Vickers Commission and the Parliamentary Commission on Banking Standards said banks should have a leverage ratio of at least 4 per cent. But George Osborne, who commissioned both reports, has sided with the financial lobby and said 3 per cent will be quite enough.
It won't be. This battle isn't over. There's still a lot more work to be done by the Threadneedle Street Taliban to make banks like Barclays safe enough to be tolerated by taxpayers.
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