Salz Review - Wall Street Journal

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217 Salz Review An Independent Review of Barclays’ Business Practices Regulatory Capital Barclays’ tier 1 regulatory capital ratio has varied over the last decade, from 8.2% in 2002, to 7.6% in 2007 and 13.3% in 2012. A significant restructuring of the balance sheet (increasing shareholders’ equity and reducing the total balance sheet size) led to a significant increase in capital ratios in 2009. There has been considerable debate concerning bank regulatory capital ratios, which are recommended by the Bank for International Settlements or Basel Committee on Banking Supervision and implemented by national regulators. In the European Union, these are translated into Capital Requirements Directives. Under the original Basel I Accord from 1988, banks were required to have a capital ratio (percentage of capital to risk weighted assets) of 8%, of which core capital (tier 1) had to be 4%. Assets were weighted according to relatively simple rules, such as 20% for OECD governments, 50% for residential mortgages and 100% for other assets. Tier 2 capital comprised certain reserves, hybrid capital investments and subordinated debt. Basel II then required the capital ratio to be no lower than 8%, divided into two tiers, and required banks to have a minimum level of common equity (2%) and tier 1 capital (4%). It came into force at various dates. Basel II attempted to adjust risk weighted assets based on credit, market and operational risk. Banks could use, subject to regulatory consent, advanced measurements based on their own models or standardised (non-modelled) approaches. Basel II also mandated more disclosures. Basel III, when fully implemented, will introduce a number of important changes to strengthen the quality and quantity of capital, including more capital for counterparty risk and derivatives, procyclicality and capital conservation buffers and other liquidity and funding ratios. Originally, it required an increase by 2015 in common equity from 2% to 4.5% (plus a capital buffer of 2.5% to total 7%), and tier 1 capital increased from 4% to 6% (plus other capital buffers). The minimum total capital ratio remained at 8% (plus capital buffers). The EU is currently working on Capital Requirement Directive IV to implement Basel III, plus changes to corporate governance and remuneration.
479 563 646 746 543 670 927 1,110 733 1,206 1,340 1,413 1,612 1,814 2,129 2,414 Salz Review An Independent Review of Barclays’ Business Practices 218 Barclays’ capital ratios and illustrative requirements, 2002 – 2012 % 20 15 Tier 1 ratio Core Tier 1 ratio Total Capital ratio 16.6 13.0 16.9 13.5 16.4 12.9 17.1 13.3 10 5 8.2 7.9 7.6 7.0 7.7 7.6 4.7 8.6 5.6 10.0 10.8 11.0 10.9 Ratio requirements: Basel III total capital Basel II total capital Basel III Core Tier 1 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Basel I Basel II Basel III Note: For global systemically important banks, such as Barclays, an additional loss absorbency requirement, which could consist of either equity, non-equity capital or highest quality loss absorbing debt, will be phased in starting from 2016 Sources: HM Treasury, Banking reform: delivering stability and supporting a sustainable economy, 2012; Barclays annual reports Dividend Payout Ratio Barclays’ dividends paid to equity holders of the parent company and payout ratio, 1996-2012 £m Dividend payout ratio 3,000 2,500 2,000 1,500 29% 50% 49% 42% 37% 45% 54% 49% 43% 47% 40% 48% 55% Dividend pay-out ratio not meaningful in 2012 22% 60% 40% 1,000 15% 20% 500 0 113 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Dividends paid (£m) Dividend payout ratio (%) 1% 0% Notes: Payout ratio computed as dividends divided by profit for the year attributable to equity holders from the parent; Dividend payout ratio not meaningful in 2012 as profit for the year attributable to equity holders from the parent was negative; Dividends booked according to UK GAAP for years 1996 to 2003 Source: Barclays annual reports
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