Salz Review - Wall Street Journal

Salz Review
An Independent Review of Barclays’ Business Practices
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remain independent, and a close call involving extensive debate with FSA officials.
Nonetheless, the bank announced on 27 March 2009 that it had passed the stress
test. Interviewees told us that this was seen as a significant milestone for Barclays,
reaffirming its determination to avoid any Government ownership.
5.24 Barclays also passed a subsequent 2011 stress test mandated by the European
Banking Authority. 63 However, Lord Turner, Chairman of the FSA, expressed
concerns regarding Barclays’ stress test presentation during this process. In a letter
to Marcus Agius in April 2012 (see Appendix K), he described it as “confusing and
potentially misleading”. He added that it “appeared to be an attempt to leave FSA
senior management with the impression that Barclays would be above the then
intended 10% ... threshold, whereas Barclays was actually at 9.8%. … Given that the
eventually chosen ‘pass mark’ was 9%, this did not turn out to be of crucial
importance. But it nevertheless left our senior management with an impression that
Barclays were seeking to ‘spin’ its messages in an unhelpful fashion.” 64
5.25 Barclays’ management maintains that the exchange reflected a misunderstanding
caused by the rapid turnaround the regulators required and the way in which
communication between the two parties took place. Management said that they were
surprised at the regulatory response, given that they had received limited questions
during the submission time. We understand that these questions related primarily to
matters such as the different treatment of minority interest reserves, which could
have affected the outcome. With the benefit of hindsight, we consider that Barclays
was insufficiently sensitive as to the impact of its handling of the stress tests on its
relationships with the FSA and quite possibly other public authorities and politicians.
Risk Transfers
5.26 At the height of the financial crisis, when capital was scarce, the FSA learnt from
market participants that a number of banks were creating Tranche Protection Trades,
synthetic securitisation transactions that would reduce their capital requirements. 65
The transactions had unclear economic purpose and had the effect of reducing the
capital in the overall system without reducing the risk. Barclays took part in a number
of these transactions.
5.27 On 24 July 2009, Jon Pain, the FSA’s Managing Director of Supervision, told the
banking industry that the FSA believed that such transactions should not be used to
reduce capital requirements where little or no economic risk is transferred. 66 He
recommended firms to follow a substance over form approach and reminded them
that they should discuss with the FSA any securitisations, or other credit protection
arrangements, which were material or had complex features. A few months later he
added: “If firms have reason to believe that the FSA may have an interest in
63 European Banking Authority, 2011 EU-wide Stress Test – Aggregate Report, 15 July 2011.
64 Letter from Lord Turner, Chairman of the FSA, to Marcus Agius, Chairman of Barclays, 10 April 2012;
www.publications.parliament.uk.
65 For example, by delaying recognising losses by buying protection from another bank that nominally takes
on the risk.
66 FSA, FSA letter to industry on synthetic securitisation transactions, July 2009.