HEARD ON THE STREET: Barclays Capped By Regulatory Risk

12th Jul 2010 22:31

By Simon Nixon A DOW JONES COLUMN Barclays shares enjoyed a much-needed boost last week from speculation the U.K. bank was mulling a spin-off for Barclays Capital--something that would create significant value, according to a Mediobanca research report. Barclays was quick to dismiss the idea, reaffirming its commitment to the universal bank model. But the idea of a Barclays breakup being pain-free reassured those investors spooked by fears the U.K. may force such a split. In reality, while the regulatory risks are real, the costs of any such breakup would likely be very high. Disentangling Barcap from Barclays would be very complex, not least because the two aren't even separate legal entities. Most of Barcap's positions, including derivatives exposures, lie on Barclays Bank PLC's balance sheet. More importantly, there are major synergies between the divisions. First, Barcap gets cheaper funding than it could access stand-alone. Credit-default swaps on Barclays Bank's debt cost 1.28 percentage points, well below stand-alone U.S. investment banks Goldman Sachs and Morgan Stanley, on 1.70 and 2.25 percentage points, respectively. Although Barcap can use repo markets to fund much of its securities business, it needs access to unsecured funding for its wholesale lending business. To keep its double-A rating, a stand-alone Barcap would likely need higher capital ratios, hitting returns on equity. A second area of synergy is Barclays' combined treasury book, currently GBP130 billion ($195.87 billion), which is managed by Barcap. This book is largely in cash or near-cash assets, so returns are low. But Barcap gets cheap funding for a major trading operation, which given steep yield curves, is a potential source of profits. A major source of this liquidity is the retail bank, where the loan to deposit and long-term funding ratio is currently 81%. The use of these retail deposits to provide cheap funding to Barcap exposes depositors to investment-banking risk. The snag for Barclays is that the greater the implicit subsidy between the two businesses, the more likely the U.K. government will want to break it up. Barclays may argue the universal bank model held up well in the crisis while some narrower banks, favored by policy makers, collapsed. But Chancellor of the Exchequer George Osborne, Governor of the Bank of England Mervyn King and other U.K. policy makers have warned against any business model that exposes insured retail deposits to investment-bank trading risks. Barclays trades at just 0.8 times tangible book value, a substantial discount to European peers, largely reflecting investor fears over regulatory risks. The fact that disentangling the two divisions would be so expensive shows the fears are well-founded. -By Simon Nixon, The Wall Street Journal; [email protected] (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires July 12, 2010 17:31 ET (21:31 GMT)