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.