Duncan’s Economic Blog

Barclays to take more risks

Posted in Uncategorized by duncanseconomicblog on April 5, 2011

I worry about the prospects of proper banking reform in the UK – I worry that the government will water down whatever the Vickers’ Commission reports, I worry about Osborne been too keen to relax liquidity rules and I worry that we are failing to properly debate the really big issues in banking.

I’ve also written (for example in my IPPR chapter) that the relationship between finance and property in the UK economy has created serious problems for industry and investment.

But despite all of this, I still occasionally defend the banks. When I hear people wishing that the banks would stop ‘holding us to ransom and just go’, I resist. I tell them that yes – there are huge problems with the British banking sector but I point to the tax revenues they pay, the large (and important) balance of payment effect of being a exporter of financial services and sometimes I worry about what could quickly replace them as employers.

But when I read in this morning’s FT that Bob Diamond wants to increase Barclays risk appetite, something inside of me snapped.

Bob Diamond has decided Barclays must increase its risk appetite amid internal expectations at the bank that a key measure of its profitability will fall or stay stagnant this year

They are making 7.2% return on equity – perfectly good given where interest rates are – not to mention £6bn of profits.    

But a 7.2% ROE isn’t enough – they want 13% by 2013.

If Barclays seriously want to increase their risk appetite, fine. But they can do it from New York.

10 Responses

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  1. Dave Holden said, on April 5, 2011 at 12:07 pm

    As a lay person one of the common traits I’ve found in the economic commentariat (and economist’s in general) is a funny kind of myopia. Too often it’s “X does this amount of good” with very little mention or even cognisance of the follow on effects Y and Z.

    In the case of banks we still hear “but look at the taxes they bring..” or “..what about the wealth creation in the city” which are all well and good but they need to be seen in the context of their responsibility for levels of malinvestment and wealth destruction never before seen.

    We really should be happy to see them go.

  2. Luis Enrique said, on April 5, 2011 at 1:39 pm

    what if taking on more risk means lending more to small businesses and entrepreneurs? (I don’t imagine that’s what he has in mind, I’m merely pointing out “more risk” shouldn’t be identified with “bad”)

    it’s also ambiguous – for simplicities sake, risk is can be thought of as a product of the nature of the assets you own, and how highly leveraged you are. If he meant taking on more risky assets from a position of low leverage, that’d probably be a good thing, if he means increasingly leverage, bad.

    I wonder what he does mean … what will “taking on more risk” look like?

    • Cian said, on April 5, 2011 at 4:36 pm

      Proprietory trading and derivatives.

    • Philip Martin said, on April 6, 2011 at 2:00 pm

      I’ve noticed Luis that you’re often good at pointing out these ambiguities but you can be too fair when it’s obvious where the direction of travel is going. From 7% to 13% in 2 years suggests high leverage to me…what d’you think?

      • Luis Enrique said, on April 11, 2011 at 9:18 pm

        Philip

        yes I have often thought the same about myself.

        But is it obvious he means to increase Barclays’ leverage? What about Basel III requirements to reduce leverage? (not that I’m crystal clear on them). Is he saying Barclays can undermine those rules and increase leverage whilst appearing to decrease it? Or does Barclays already have an equity to assets ratio higher than Basel III will require, so leverage can be increased?

  3. Tanweer Ali said, on April 5, 2011 at 6:38 pm

    Of course this also all depends on who exactly is taking the risk. Recent history would suggest that the taxpayer would be heavily exposed to the downside of the type of risk Mr. Diamond probably has in mind, so we’re really talking about generously state subsidized risk-taking. If New York (or anywhere else) were to welcome such activity, well, more fool them…

  4. Strategist said, on April 5, 2011 at 11:07 pm

    “Poor old Barclays: perhaps there will be no one left to trade with in New York, by the time they get there.”

    http://www.nakedcapitalism.com/2011/04/here-there-and-everywhere.html

  5. […] the same time too concentrated in a few firms, too indebted to positively contribute to growth, too risk tolerant due to subsidy and too arrogant to see […]

  6. stephen said, on April 8, 2011 at 12:13 pm

    If you are going to have casino banking there is a lot to be said in terms of spreading risks of including such operations with more traditional banking (aren’t these the Banks that rode the crisis the best?). What you shouldn’t do however is to put the croupier in charge as appears tio happened in Barclay’s case. Shouldn’t Barclays non-execs/instutional investors/regulators be trying to rein him in pdq. It would be excellent signal of the Bank of England were to demand his head – especially since the I supect the Vickers Commission will deleiver next to nothing.

  7. […] the same time too concentrated in a few firms, too indebted to positively contribute to growth, too risk tolerant due to subsidy and too arrogant to see […]


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