Plans in the United States to cut banks down to size and limit some of their riskier practices will not prevent another financial crisis, Barclays' chief executive John Varley warned yesterday.
As the first in a number of bank bosses to give evidence to the House of Commons Treasury Select Committee, Mr Varley offered a defence of the global banking system, just hours after another Parliamentary body, the Public Accounts Committee, said that the taxpayer-sponsored bailout of the banks had cost UK taxpayers £850bn.
The former US Federal Reserve chairman Paul Volcker has proposed plans to break up large banks, stop their so-called proprietary trading desks using depositors' money, as well as running hedge fund and private equity arms. The Volcker Plan has been endorsed by the Obama administration.
Mr Varley said that the unilateral plans would not remove risks. "The system would not be served by making big banks smaller; the system would be served by making big banks safer," he said. "I've seen many times in my career the beneficial impact of investment banking cycles and retail banking cycles being asymmetrical. It has happened in the course of the last two years and it has happened in previous times in my career that, in a time retail banking is suffering, the investment banking system is performing well, and vice versa."
He added the Volcker Plan would be "inconsequential" and "irrelevant" to Barclays which, unlike a clutch of banks on both sides of the Atlantic, including Royal Bank of Scotland and Lloyds Banking Group in the UK, has not received any direct state aid. One of the reasons for RBS's troubles was its top-of-the-market buyout of the Dutch bank ABN Amro in 2007. RBS secured ABN after outbidding Barclays.
Mr Varley added that Barclays Capital, its investment banking arm, did not use depositors' money. The bank grew considerably last year after buying up a number of the profitable divisions of the collapsed Wall Street investment bank Lehman Brothers. Barclays does have a private equity business, which it is expected to sell.
The US is thought to have run out of patience with bodies, such as the G20, which have spent months considering regulation without producing firm plans.
The UK Government has given only a lukewarm response to the Volcker Plan, while the Conservatives have wholeheartedly backed it. Speaking last month, the shadow Chancellor, George Osborne, said: "President Obama has created a lot of space for the rest of the world to come up with what I think would be a sensible system of international rules and agreements that creates a strong and competitive City of London, but also a safely regulated one."
However, Mr Varley issued a stark warning to the cross-party select committee, saying that too much regulation could stifle the fragile economic recovery.
Overburdening the financial sector could make banks "risk-averse", he said, which could lead to "unacceptable" borrowing costs for consumers. "The economy depends on banks being prepared to take risks and lend. Swamp them with capital requirements and they will not be able to step up to the plate," he added.
The Barclays' chief executive also revealed that the bank was an early participant in the Financial Services Authority's living wills scheme, which would allow banks to be broken up in the future without taxpayer help.
The rules are seen as an alternative to forcing banks to divide their retail operations, which are perceived as safer, from their investment banks, where traders take greater risks.