Salz Review - Wall Street Journal

39
Salz Review
An Independent Review of Barclays’ Business Practices
5. The Struggle for Survival through the Financial Crisis
5.1 By autumn 2007, leverage had built up to dangerous levels in the financial system
globally. Banks became reluctant to lend to each other and liquidity dried up, leading
to sharp falls in the value of many types of assets. The financial crisis led to a
collapse of consumer and business confidence and a recession. Regulators in the
UK and elsewhere increased the capital and liquidity requirements for banks to take
account of possible stress conditions and intensified their supervision.
5.2 The first sign of the financial crisis was the collapse of the US sub-prime mortgage
market which left banks exposed to fast-growing losses on the complex securities
created to finance such mortgages. It became difficult to value those illiquid assets
which were held widely by many financial organisations, including the banks. This
caused uncertainty around the recognition of losses, which would reduce capital –
and with new capital hard to raise, the uncertainty caused them serious difficulties.
5.3 In the turmoil, intensity and unpredictability of the financial crisis, most banks – and
Barclays was no exception – were struggling to survive. Barclays was determined to
remain independent. Among other things, it believed that independence would allow
it to take advantage of opportunities that would arise during the crisis – a belief
justified by the September 2008 Lehman transaction.
5.4 Regulators took a close interest in the Barclays balance sheet because of the
importance of the investment bank to its business. And Barclays was highly
leveraged: its leverage at the end of 2008 was 43, higher than the other UK banks
(RBS’s leverage was 30 at the time), but lower than Deutsche Bank and UBS. 51
As was the case with a number of banks, leverage levels were not immediately
apparent from its published information because of complex, off-balance sheet
securitisations and derivatives.
5.5 Following the collapse of Lehman Brothers, the UK government (and other
governments around the world), in order to prevent a collapse of the financial system
and with a view to restoring confidence, were anxious to support banks by providing
sufficient capital to sustain their businesses through the crisis.
5.6 In October 2008 Barclays came under particular scrutiny. Around the time that
Government support was given to RBS and LBG, Barclays had to convince the
Treasury and regulators that it was strong enough to survive independently.
It persuaded the authorities that it was, subject to a plan to improve its capital
position. It also passed the regulatory stress tests in 2009 and 2011.
Illiquid Securities
5.7 Barclays’ investment bank had expanded its US structured credit business quite
rapidly before the crisis, most importantly through the acquisition of HomEq
51 See Appendix I for UK banks’ leverage evolution; care must be taken when comparing leverage ratios
between financial institutions in different jurisdictions, as rules for netting assets and liabilities may differ.