It’s not the job of a chief executive to follow the herd, but usually, they do it anyway.
Bank chief executives since the financial crisis haven’t been rewarded for independence of approach — the boss of nearly every European firm has prescribed some combination of balance sheet and staffing cuts, simplified IT systems and org charts, pruned client lists and a retreat from the more esoteric end of fixed income trading.
So it’s refreshing to see Jes Staley at Barclays take his own approach. Since joining the firm almost two years ago, he’s hired top drawer talent for the investment banking division, not just in “asset light” and “originate-to-distribute” businesses, but in regulatorily-restricted, balance-sheet heavy businesses such as rates solutions, securitization trading and distressed debt.
Now, Staley is backing the hires with balance sheet, promising an extra £50bn in leveraged balance sheet will become available, with little overall increase in risk-weighted assets. Barclays plans to reallocate RWA away from low returning corners of the corporate bank into markets, but Staley made it clear that the major boost is to the leveraged balance sheet — implying a concentration on lower risk assets.
Comments from finance boss Tushar Morzaria on the investor call seemed to back it up — he discussed market financing rates, and offered, purely as an example, an example of a 50bp financing rate on £10bn of additional assets. That doesn’t sound like he’s thinking about punting it all on distressed.
But it’s deeply at odds with recent regulation. Repo markets have thinned out under pressure from the leverage ratio and liquidity ratios, while collateral is scarcer than ever, thanks to central bank actions, margin rules for derivatives and the shift to secured short term funding.
That ought to make providing collateral an activity with more potential value — but should also shrink the total book of business on offer.
FICC trading has other problems too. Vanilla business in US Treasuries, bond futures and interest rate swaps is increasingly dominated by specialist principal traders like Citadel Securities, KCG and Virtu Financial.
These firms aren’t competing on financing, since they’re trading for their own account, but they cut off a steady stream of execution revenues from the banks. With the buy-side increasingly under pressure to prove they’re achieving “best execution”, vanilla FICC activities will increasingly be low margin, electronic and executed with one of these principal traders rather than a bank.
That said, if a move to bulk up in rates and macro trading works for any European bank, it ought to be Barclays. It’s always placed high in the primary dealer league tables across EMEA, and high in the league tables for public sector syndications. It’s advancing from a place of strength, not trying to shore up a subscale business that should be put out of its misery.
But the caveat “of the European investment banks” is important. All the large European-domiciled banks are more constrained by the leverage ratio than the big US banks. The prospect of US-focused deregulation — taking US Treasuries out of the leverage ratio, for example — will help Barclays, but it will help JP Morgan, Citi and BAML much more.
Staley also has to contend with the shape of Barclays. One analyst on the call tentatively pointed out that Barclays' investment bank was returning 5.9% (far below its implied cost of equity) while Barclays' UK retail business was returning 18% — and had further upside if yield curves steepened.
The numbers are hard to argue with, but Staley pointed out that a purring fixed income division ought to produce outsize returns as volatility returned — offsetting a possible downturn in retail revenues that a market disruption or a recession would produce. The low volatility that has poleaxed FICC revenues across the Street can’t last forever.
Maybe. But the returns from retail and returns from markets are still very far apart.
Barclays will surely find it easier to deploy any of its excess capital into government bonds and repo than to slug it out originating UK mortgages, and perhaps this is the attraction. It offers an opportunity for the bank to grow, and build its market business back up to the kind of scale it once possessed.
But though bold contrarian bets are heartening to see, there’s a long way to go before Barclays can prove that the strategy works. It might be that the decline in FICC revenues is not just cyclical but structural.
Best of luck to Staley and to Barclays — but it’s a big risk to take.