Will Barclays PLC Overstretch Itself Again?

Is Barclays PLC (LON: BARC) strong enough to avoid a future crunch?

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While Lloyds and TSB had to go cap-in-hand to the UK government in order to stay afloat, Barclays (LSE: BARC) (NYSE: BCS.US) managed to survive without having to beg.

But how close did it get, and is it now strong enough to head off any similar threats in the future?

Capital weakness

barclaysI’ve already looked at the beefing-up of capital requirements for banks, and it’s when a bank doesn’t have the capital to cover bad debts and still have enough left to pay out people wanting their cash that the trouble starts. In fact, there’s some dangerous feedback at play.

As soon as savers start to worry that a bank might not be able to cover their cash, they rush to make a withdrawal while they still can — but that in turn puts pressure on the bank’s capital and makes it more likely it will have liquidity problems. And we end up with queues of anxious savers outside branches of Northern Rock, in what became the first card of the house to fall.

Tougher requirements

These days, regulatory requirements oblige a bank to maintain a Core Tier 1 ratio (which compares the banks highest-quality capital with its risk-weighted assets) of at least 7%, so how is Barclays going?

As of the bank’s latest full year results for December 2013, we saw Core Tier 1 capital of £48.6bn, leading to a ratio of 13.2% — and that’s up nicely from 10.8% a year previously. And looking forward to more stringent requirements from future Basel III rules, Barclays reported a Common Equity Tier 1 ratio of 9.3%, which is even stricter on qualifying capital.

But it’s taken a while for this reassuring strengthening to come about. At the end of 2008, Barclays could manage a Core Tier 1 ratio of only 5.6% — although that was enough to satisfy regulatory requirements at the time, it does show how woefully inadequate the rules were back then.

It was close

In fact, Barclays only just escaped the ignominy of taking the taxpayers’ shilling when it managed to secure £7bn in new cash from investors in Abu Dhabi and Qatar in late 2008 — earlier that year, an attempt to raise £4.5bn from a rights issue had been a bit of a flop, with only 19% of the bank’s shareholders taking up the offer.

So, things are looking safe again, for now — but who knows what shape the next banking panic will take once over-confidence and complacency set in again?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan does not own any shares in Barclays.

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