Barclays today announced a fancy new capital plan that illustrates the subtle cultural differences between US and UK banking. When U.S. regulators want banks to raise more capital, they tell them to do it by 2018, and the banks spend the intervening five years whiningabout it. When UK regulators want Barclays to raise more capital, they tell them to do it by June 2014, and Barclays goes out and announces a rights offering pronto. A rights offering! That preferred European way of raising capital has a pleasing symbolism; it’s like, okay you equity holders, you let your management get into this mess, and you’re responsible for fixing it, so cough up some more cash or there’ll be consequences. Bail yourselves out.
The mess, in this case, is that newish leverage-ratio rules require European banks to have assets (measured under IFRS, plus some off-balance-sheet stuff) equal to no more than 33.3 times their capital, and Barclays is at a somewhat astounding-sounding 45.9x,1 so it either needs to chuck around a third of its assets or raise about a third again of its capital or some combination thereof.
In the war against bankers’ pay the EU has a secret weapon:
Banks should pay bonuses in debt, which would be wiped out if a bank failed, an EU banking report will suggest as Europe attempts to step up the fight against bankers’ pay.
I’ve been sort of fond of this for a while. It’s a way for bankers to eat their own cooking: if you’re a banker, what you produce, more or less, is debt, so you might as well stand behind the basic soundness of that debt by owning lots of it. You can fine-tune this theory – for instance, Credit Suisse circa 2008 produced asset-backed securities, and Credit Suisse circa 2011 produced derivatives-counterparty credit risk, so that’s what its bankers got – but the basics are sound. In particular, if you are a banker, one thing that you don’t produce – that is sort of an unwanted byproduct of your operations, imposed by regulators but not particularly liked by you – is equity, so getting paid in equity is a little perverse.1
There’s a little theoretical tension here, though, which is that there’s also good reason to think that bankers should be the lowest on the totem pole in terms of getting their money back if they blow up their banks. You could just about imagine a bank capitalized with 10% equity, 10% banker-pay junior debt, and 80% senior debt, say, failing and recovering 85 cents on the dollar. So the real debt gets paid off 100%, but where does the 5 cents go? Classically the “debt” that the bankers get is senior to the “equity” that public shareholders get, but it seems a bit rough to pay the nasty bankers before you pay the widow-and-orphan shareholders. Read more »
First order of business: bonuses. Bobby’s been working on something he thinks you’re gonna love.
Bob Diamond will stamp his authority on Barclays next month, when the incoming chief executive announces a radical overhaul of the way it pays its top bankers as part of a broader strategic review that could see the group shed staff and put increased pressure on underperforming businesses. According to people close to the plans, Mr Diamond aims to use innovative bonds – so-called contingent convertibles, or cocos – to pay a large portion of the bonuses for more than 1,000 bankers, those ranked at managing director level and above.