The final curtain is about to come down on one of the City’s of London’s longest running shows. Ever since Big Bang in 1986, when deregulation opened up access to securities markets, the attempts of British banks to compete with the leading Wall Street houses have created a compelling spectacle full of big bets, ruined reputations, and fortunes won and lost. But comments last week from John McFarlane, Barclays’ chairman, suggest that the play is finally moving to a smaller theatre.
“When you look at the dominant investment banks, they are North American” said Mr McFarlane. “They have the scale that we no longer have to be global so we are going to have to focus.” It was a devastating comment from the head of the one British institution in the investment banking big league. Is he right and if so what does that mean for Barclays and the City?
What to do about investment banking is a question that has troubled Barclays ever since 1983, the year Timothy Bevan, a great-grandson of the first chairman, signed off on a proposal to buy and build an investment bank. It proved to be harder than it looked for Barclays and the other British groups trying to muscle in on Wall Street. The Americans had capital, experienced management and a hugely profitable home market. They powered into London, grabbed the biggest deals, hired many of the best bankers and squeezed margins. Globally aspiring UK investment banks were forced to give up.Barclays was the last one standing until it sold its equities and corporate finance business in 1998.
But Barclays and investment banking were not quite done. Under the American Bob Diamond, it cleverly worked its way back into the business, culminating in the acquisition of Lehman’s US business in 2008. It secured and indeed retains a seat at Wall Street’s top table.
Yet just as Barclays sat down, others got up to leave. Stringent regulations after the crisis forced banks to conserve capital and cut unprofitable businesses. Clients who had once preferred to buy products from full-service institutions came to accept that specialists have a role to play. The fashionable investment-banking model has become the slimmed down, return on assets-focused version exemplified by the likes of UBS rather than that of the monsters that once gobbled up market share and capital. Only a handful of global players remain.
The “shrink-and-swim” strategy implied by Barclays last week is thus perfectly credible. It starts from a position of strength; pruning is easier than growing; and investment banking-light is a proposition shareholders, clients and staff find credible today.
Yet Barclays’ decision to refocus has consequences for the City. It would leave the UK without a global competitor — just as it was between 1998, when the company last withdrew from full-service investment banking, and 2008 when it went back in.
Last time it seemed superficially not to matter. London flourished as a global financial services capital. Employees, clients and regulators grew used to the idea that head office was in New York; and jubilant bankers derided the idea of national identity in the fast and fluid world of global finance.
The banking crisis gave cause for second thoughts about this Panglossian idea. By adopting US-style investment banking, the City had thrown away its cherished traditions of prudence and patience, and left the UK unhealthily exposed to a business it did not understand. What happened in the next decade was that the authorities stood back and lost control.
The presence of Barclays Capital in the middle of the global stage offered a brief period of knowledge and influence. Its absence will leave the UK more vulnerable.