Salz Review - Wall Street Journal

Salz Review
An Independent Review of Barclays’ Business Practices
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5.52 It is clear to us that Protium damaged Barclays’ reputation in the eyes of its
regulators and the market. We consider that Protium serves as an illustration of:
― The very significant financial pressures Barclays experienced during the
financial crisis and its desire to reassure the market on its management of risk;
― A complex transaction which Barclays believed complied with the rules but
some stakeholders questioned as being inconsistent with their spirit;
― Communication misunderstandings between Barclays and the FSA;
― A mis-judgment by Barclays management and the Board as to the potential
damage to the bank’s reputation in taking an approach which, as it turned out,
tended to confirm sceptical attitudes to Barclays assets and their valuations;
― The inclination to use unusual incentive arrangements to reward and secure
important expertise.
Models to Calculate Capital
5.53 Banks can calculate the amount of capital they are required to hold under the Basel II
rules by using either their own models or standardised approaches prescribed by local
regulators (with any specific modification approved). 83 Since the models differ
between banks and the regulatory approaches differ by country, it is recognised that
there can be significant variations in the resulting risk asset weights. 84
5.54 In a letter from Lord Turner to Marcus Agius on 10 April 2012, the FSA 85 wrote
that, during the 2008 discussions on capital requirements, “Barclays was not fully
transparent … about the RWA 86 impacts of a proposed extension of model
approaches”. 87
5.55 We understand that this relates to discussions between the FSA and Barclays,
following the Lehman acquisition in 2008, concerning the approach to be used to
calculate regulatory capital requirements for the US entity when producing Group
consolidated capital requirements. At the time of the acquisition, regulations allowed
UK banks to use local standardised approaches for assets in foreign entities for
capital purposes. However, this changed in 2011 when, like regulators in other
EU countries, the FSA began requiring banks to use its rules for these assets.
5.56 Barclays’ interviewees told us that the FSA is continuing to review the systems and
calculations Barclays uses in the standardised (non-modelled) approaches following
the concerns expressed above about risk-weighted assets.
5.57 We consider this to illustrate how stretched Barclays’ systems and operational
processes were by the Lehman transaction, combined with business growth and
changes in the regulatory environment. We are aware that it is common for banks to
83 The standardised approaches are sometimes referred to as non-modelled approaches.
84 See Appendix J.
85 See Appendix K.
86 A financial institution’s Risk-Weighted Assets (RWA) represent the base minimum amount of capital
required; it is computed as a percentage of the financial institution’s assets, weighted by risk; see
Appendix J.
87 Treasury Select Committee, Fixing LIBOR: Some preliminary findings – Appendix, 9 August 2012.