Barclays has done a number on European banks. On Tuesday morning it has published a full 351 pages worth of research, in six separate notes, as it started coverage of the sector with the team it poached from Citigroup.
FT Alphaville will be picking out some highlights — to begin with, the notion of ‘Too Big Too Fail’ (TBTF).
Here’s what the BarCap analysts, led by Simon Samuels and Mike Harrison, say:
Banks have not always been this big. Indeed, as recently as 1990 none of the top 25 banks in the world boasted a balance sheet larger than their host country’s GDP (indeed, bar UBS, they were all less than one quarter of their host country GDP). By 2007 – on the eve of the financial crisis – this had totally changed . . .
Total balance sheet is not the only measure of size, but it is an important one. Eventually, if banks get too big, then national governments – as the ultimate guarantor of the system – lack credibility. This was exactly what happened to Iceland in 2008, and presumably would have happened to Ireland were it not a Eurozone member. Other measures – such as employment within financial services – show a similar pattern with the proportion of the working population in Europe employed in financial services rising from 10% in 1990 to 15% today. However sliced, banks have got bigger.
“So what?” you might ask. On one level, it is a perfectly reasonably question. It is not that long ago that the prevailing mantra was that bigger banks were safer. Moreover, there was hardly a detectable size-related pattern to the banks that “failed” in this crisis. Universal and narrow banks, large and small banks all ended up being rescued by either their governments or their competitors.
Whilst banks may have got bigger relative to the wider economy, it is not at all clear that bigger banks are more vulnerable. Indeed, to put the point another way – it could be argued that smaller, more narrowly defined institutions are more vulnerable to failure (see later).
That, however, misses the crucial point – namely that an industry that has been forced to rely to an unprecedented extent on its taxpayer base (capital injections for some banks, funding and funding guarantees for all banks) must expect those taxpayers in turn to demand widespread restructuring. The taxpayer cry is simple – “this must never happen again” . . . A number of major economies have either committed and/or distributed a significant percentage of their GDP as part of the rescue of the global banking sector. And it is for that reason that the debate over the cost to the taxpayer of failure – especially for those banks deemed TBTF – has now emerged.
And the TBTF response could take three forms, according to Barclays.
First, you could force banks to get smaller, though the analysts say a simple screening by size would not have predicted bank failures in the recent financial crisis.
Second, you could try to make banks “fail proof” by improving their solvency or liquidity (i.e. boosting their capital or requiring them to hold more liquid assets, be more self-funded, etc.).
Third, you could try to implement some sort of “controlled failure” procedure (the idea of living wills etc.).
Barclays’ biggest point though, is that regulatory proposals will be felt by banks deemed TBTF.
The BarCap analysts have accordingly come up with a list of 20 European banks they think could be considered TBTF by virtue of their size, interconnectedness or just identification by regulators as systemically important.
The results are below, click to enlarge.
In addition to identifying those 20 TBTF banks, Barclays also shows the impact of them having to carry additional regulatory capital above the sector average (currently Core Tier 1 of 8 per cent for 2011).
So for instance, if Allied Irish were to increase its Barclays-forecast 2011 Equity Tier 1 level of 3.3 per cent, to 5.3 per cent, it would need additional capital equivalent to a whopping 603 per cent of its current market value. Yowzers.
By contrast, banks like Credit Suisse and UBS would be relatively unaffected by such a measure, since they’ve already, in the words of BarCap, experienced a process of “massive deleveraging that the Swiss regulator has already forced upon them – which has taken their core capital ratios 400bps higher than the industry – precisely in recognition of their TBTF status.”
A point aptly summed up by the below chart (riffs of which, we’ve seen before):
Related links:
The problem is not TBTF, but TDTR - Naked Capitalism
All hail the Basel banking regime change – FT Alphaville
Banks too big to (excessively) bonus, FSA says – FT Alphaville
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