Jeremy Warner: Barclays mulls £50bn of asset protection

Outlook Lloyds Banking Group is said to be stamping its feet in rage over the penalty terms of participation in the Government's Asset Protection Scheme. Regrettably for the chief executive, Eric Daniels, he has little option but to bend over and take what ever punishment the civil servants choose to impose. There is no point in him bleating that the Government owes him one for helping out with HBOS. He bought into a pig in a poke when he merged with the beleaguered mortgage bank, and he now has to live with the all too brutal consequences.

But what of Barclays, which beyond liquidity support has so far managed to avoid taking any of the UK Government's money? John Varley, the chief executive, is like the cat with nine lives. Were it not for the hubris of Sir Fred Goodwin, it would have been Barclays, and not Royal Bank of Scotland, which ended up with the toxic assets of ABN Amro.

Lehman Brothers proved an equally lucky escape. Barclays wanted to buy the whole thing when it was teetering on the brink last September, and was only finally deterred when the US authorities refused to provide the required guarantee of liabilities through to completion of the deal. Either of these acquisitions, had they been successful, would have holed Barclays below the water line.

Napoleon said the quality he most valued in his generals was luck, and Mr Varley seems to have it in spades. Yet though luck may have enabled Barclays to escape outright wipe-out, the share price continues to reflect deeply rooted doubts over the shape of the balance sheet. There's a credibility problem which Barclays has yet to overcome.

The addition of Simon Fraser to the board as a non-executive director ought to help. Mr Fraser is a former chief investment officer at Fidelity. He'll understand the concerns shareholders have about the way Barclays has managed its way through the banking crisis better than any.

On the asset protection scheme, Mr Varley is insistent that if he uses it at all, he'll pay in cash. Is that really credible? Three portfolios of assets with a face value of a couple of billion each have already been put forward as a way of testing the waters. If the proposition stacks up commercially, then Barclays plans to insure a total of around £40bn to £50bn of assets. This is much lower than both RBS and Lloyds, but then Barclays claims that the quality of its loan book is much better. Is this comparatively small amount of insurance enough? And even if it is, would Barclays need to raise more capital to fund it?

Using the RBS template, insuring around £50bn of assets would cost Barclays around £8bn in impairment charges and premiums, though it is possible these wouldn't have to be accounted for all at the same time. That kind of a hit to the balance sheet might in itself require Barclays to raise more capital, except that on the other side of the ledger, derisking the balance sheet in this way may allow a commensurate reduction in required capital. In any case, there can be no possibility of Barclays raising more capital until the end of June. The "non dilution" clause that was given to Middle Eastern investors during the last recapitalisation virtually rules it out until then.

What's more, the markets may think £50bn insufficient. Barclays' loan book may or may not be better quality than rivals, but however good it is, its sheer size would seem to demand something bigger.

Yet there is one thing Mr Varley has got going for him. The purpose of the insurance scheme is to free up capital so that banks can have the confidence to begin lending again. For the Government, the scheme achieves a political as well as a public interest purpose.

Yes, it might help mitigate the worst consequences of the economic correction, but for Gordon Brown there is also the hope that it will generate sufficient green shoots of economic recovery by this time next year to get him re-elected.

Labour's electoral prospects are no part of Barclays' concern. Having not taken any of the Government's money thus far, Barclays is under no obligation to pursue the public policy objective of renewed balance sheet expansion, nor is its own commercial interest necessarily served by it. By avoiding the Government's shilling, Barclays has maintained its commercial freedom. Round at Lloyds, Mr Daniels must be rueing the day he gave it up by agreeing to buy HBOS. If participation in the scheme comes with conditions on lending and pay, Barclays may not be prepared to play ball.

The decision comes down to whether Barclays is better off out than in. This in turn depends on quite how much worse Barclays thinks the banking and economic crisis is going to get. Stephen Hester, chief executive of RBS, has called the asset protection scheme "catastrophe insurance". Mr Varley may decide he doesn't need it. Either way, he's going to require more of his fabled luck to see him through. Let the chips fall as they may.

Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific