Sky's the limit as banks rediscover their taste for risk

With Barclays' profits going through the roof, the days of the big bonus are back. But should the rest of us be celebrating? Sean O'Grady, Economics Editor, reports

It was a remarkable turnaround. Just months ago many observers believed that the entire financial system might have to be nationalised. Then, yesterday, Barclays reported profits of £3bn for the last six months, up 8 per cent from a year ago, while HSBC said that it made £2.8bn in the same period.

Both banks announced that they would make huge provisions for bad debts – a total of £13bn, as result of the worst economic downturn since the 1930s. Earlier losses on those notorious US-based mortgage backed securities are now joined in the banks' books by the more conventional type of bad debts usually encountered in recession. A rising tide of defaults, bankruptcies and unemployment around the world pushed Barclays' write-offs up by 86 per cent to £4.6bn; HSBC's provisions were up 39 per cent to £8.3bn. Yet such losses were masked by a huge rise in profits from their investment banking arms – and it is here that the mega bonuses are likely to be paid. Barclays Capital's profits doubled to just over £1bn. HSBC made investment banking profits of $6.3bn (£3.7bn).

These so-called "casino banking" activities are blamed by many for plunging the financial world and the wider economy into crisis in the first place. As markets have revived and investors have seen a return of their "risk appetite", the investment banks have reaped the benefits of the renaissance, which has also been underwritten by trillions of dollars in support for the system from governments. The American investment banks such as Goldman Sachs and JP Morgan were the first to benefit from these trends; Barclays has also benefited from its acquisition of parts of the collapsed Lehman Brothers.

The Lehman purchase helped make Barclays the world's sixth-biggest mergers and acquisitions adviser this year and has highlighted once again the issue of such high-risk activities being undertaken by the same institution that looks after ordinary customers' savings and investments – and is effectively backed by an open-ended guarantee by HM Treasury.

The idea of separating these divisions of the business has been floated by the Governor of the Bank of England, Mervyn King, although it was ruled out in the Treasury's White Paper on banking regulation last month.

Barclays accounts reveal that in its investment banking arm, BarCap, "average net income generated per member of staff" soared from £134,000 last year to £193,000 in the first half of this year alone. It leaves open the possibility of bonuses averaging around £100,000-£200,000 for the 23,000 staff working in this division – with the highest earners receiving seven figures, or more. As a result of one deal executed earlier this year, when Barclays sold its Global Investors division (BGI) to the US investment giant BlackRock, BGI's 3,500 staff will share a $1bn windfall. HSBC said: "Record revenues... were boosted by improved margins and greater opportunities to trade debt issued by governments and corporations, as they sought to alleviate symptoms of a capital drought."

There was little sign yesterday that the banks' were going to heed warnings from the Chancellor, Alistair Darling, or the Governor of the Bank of England, Mervyn King, about excessive bonuses for excessive risk taking. The chief executive of Barclays, John Varley, undertook to be "guided" on this "hot topic" by the Financial Services Authority.

"The subject of compensation is a hot topic and it is very important that we are sensitive to the views of citizens and central bankers like Mervyn King on this subject," he said. "We will make our decisions about variable compensation at the end of the year... We are sensitised to this issue and we will behave responsibly."

To many observers, however, it appears to be a case of "business as usual". Liberal Democrat Treasury Spokesman Vincent Cable drew attention the fact that, although Barclays and HSBC did not have to turn to the taxpayer for direct support in the way that Royal Bank of Scotland and Lloyds Banking Group were forced to, they are nonetheless indirect beneficiaries of the £1trillion (£1,000,000,000,000) plus in lending, liquidity support and insurance for losses on bad debts furnished by the Uk taxpayer.

Barclays lent around £17bn to UK households and businesses in the first half of the year, while HSBC lent £6.7bn of £15bn committed for new mortgage lending in the UK. Both were among the banks called in by Chancellor Alistair Darling recently for a "robust" debate on their lending polices, after which they were tacitly threatened with a competition inquiry.

The banks have also been criticised for failing to pass-on large reductions in the wholesale cost of borrowing and in Bank rates to businesses and mortgage holders as they try to repair their margins, profitability and capital position. Economists say that the shortage of credit continues to stymie the chance s of a vigorous recovery.

Mr Cable commented yesterday: "The rates charged by lenders is doing terrible damage to the British economy and ultimately the banks themselves. It's ultimately a very short-sighted and selfish approach. If it wasn't at the expense of the rest of the economy one wouldn't be complaining about it, but it is."

Results from the semi-nationalised Lloyds and RBS groups are due later this week.