We all know that RBS has issues, but what about Barclays? It's been a while since we have dwelt upon the house of Bob.
Now's the time to visit it again. Following reports in the Financial Times that the European Banking Authority is thinking of increasing the core tier one ratio of capital to risk-weighted assets from 7% to 9%, things aren't looking great for BarCap. Suddenly, it seems to need a lot of capital. And if it can't? The Financial Times says the EBA is contemplating "forceable recapitalization by governments" in six to nine months' time.
Andrew Lim, a banking analyst at Espirito Santo, explains the problem. Under Basel II and assuming haircuts of 60% on Greece, 40% on Portugal, 19% on Ireland, 6% on Italy and 0% on Spain, Barclays needs around €12bn in extra capital. "We believe that quantum is too large to do privately given current market conditions," says Lim.
This would leave Barclays with two options: go the RBS route and accept recapitalization from the taxpayer, with all its attendant ignominy and compensation constraints; or reduce its risk weighted assets substantially. Lim predicts it will opt for the 2nd. At the end of the last quarter, BarCap's risk weighted assets were 395bn. Under an adverse scenario of low growth and higher haircuts, Lim points out that they have the potential to increase in 2012.
What would reducing risk weighted assets mean in practice? BNP provides a clue. The French bank is cutting $60bn from its risk weighted assets by 2012 and is making a "significant" number of people from its investment bank redundant.
Barclays already has a cost cutting plan. In August, it announced its intention of eliminating
3,000 jobs this year, of which 1,400 had gone already. More redundancies may be necessary soon.
Any additional cuts are likely come in fixed income and financing businesses. Lim says BarCap will need to shrink its derivatives book and maybe reduce bonuses. In a note today, Morgan Stanley analysts say every bank will be, "looking to shed lending which is capital consumptive and also consumes unsecured senior funding such as asset finance, unsecured consumer finance, trade finance, syndicated lending, some SME lending and so on."