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Like it’s 1999

13 October 2015 By George Hay

Barclays is in danger of getting stuck on a strategic see-saw. If the UK bank appoints ex-JPMorgan executive Jes Staley as its new chief executive, as it could according to a person familiar with the situation, it might mark a definite shift back to investment banking. That’s basically the opposite of where Barclays was going under recently ousted leader Antony Jenkins. But for long-term Barclays-watchers, such handbrake turns are par for the course.

Today’s Barclays is the mirror image of the bank in the mid-1990s, when then-boss Martin Taylor decided to sell the equities and merchant banking businesses of the old Barclays de Zoete Wedd to focus on debt capital markets. Fast forward two decades and Barclays has just cut risk-weighted assets in the investment banking division in half, to focus more on advisory rather than its fixed income powerhouse, which came to prominence under Jenkins’ predecessor Bob Diamond.

Diamond’s achievements were tangible enough. But BarCap’s annual return on equity of close to 35 percent in the mid-2000s was always slightly misleading, according to UBS analysts. Because it under-attributed equity to the investment bank, returns viewed in today’s lens were less spectacular. Had Barclays had to hold a 10 percent core Tier 1 ratio or a 3 percent equity-to-total-assets ratio, as it does today, its pre-2007 return would have been appreciably below 10 percent.

Even if a new Barclays boss decided to reconstruct a big investment bank, they would find regulation now stands in the way. Fixed income has been neutered by high capital charges. Advisory is accordingly the right way to go, but as such everyone wants a piece of it – Credit Suisse, Deutsche Bank and the American banks are all queuing up. Even if UK rules ring-fencing Barclays’ retail arm from its investment bank don’t prove too painful, it’s not certain to work.

Staley and Chairman John McFarlane would make a decent team. It would be unfortunate if they slipped into the same patterns as their predecessors.

 

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