It took an American, Bob Diamond, to make a viable business out of Barclays’ investment bank, and it is a telling comment on the shallow pool of British banking management that Barclays has now turned to another American, Jes Staley, to lead it in the post-crisis era.
But whereas Mr Diamond’s job when he joined Barclays nearly 20 years ago was to build an investment bank from the rubble of a failed strategy after the Big Bang, Mr Staley’s task — assuming Barclays’ secures regulatory approval for his appointment — is to re-engineer the investment bank and simultaneously prepare the retail bank for a crucible year in which profound regulatory and technological change are coinciding. The task is difficult but Barclays starts from a position of strength.
On the investment banking side, soon to be separated from the retail bank by regulation, Barclays has a choice to make. Does it wish to expand it to compete with the handful of US rivals still offering a full-scale service of the kind that was the rage before the banking crisis? Or does it shrink to the asset-light model now pursued by most others?
Led by Antony Jenkins, the recently ousted chief executive, Barclays went some way down the latter route, tidying up the investment bank and shrinking the balance sheet. European banks — notably UBS, where Mr Staley is a board member — have taken this strategy further and shown it can work. And, as a result of the opportunistic acquisition of Lehman Brothers’ US business during the financial crisis, Barclays has a platform from which to rebuild an investment bank capable of challenging the top three.
The attitude of John McFarlane, Barclays’ chairman, will be important in shaping this decision. He has given mixed messages so far, forcing out Mr Jenkins, who was less than enthusiastic about the investment banking business; hiring a career investment banker in the form of Mr Staley; and then this week appearing interested in the idea of a pan-European union of investment banks to tackle the Americans. No doubt he and Mr Staley have already enjoyed some rich conversations.
On the retail side of the business, Mr Staley has little hands-on experience — though Mr McFarlane has plenty. Here again, Barclays starts from a position of apparent strength in the form of its high street branch network. But, in the fast-changing world of retail banking, this could yet prove a handicap. The swing to mobile banking is gathering pace, redefining the role of the branch — a trend that could leave Barclays with too many expensive branches and too many staff.
In addition, the UK’s Competition and Markets Authority will shortly release its preliminary findings on the state of the personal current account and the banking market for small and medium-sized enterprises. The CMA has the potential to change the free-if-in-credit model on which the big four established lenders thrive. Barclays’ apparent strength as a dominant high street bank could therefore leave it with the need to re-engineer an outdated business model, while simultaneously protecting shareholder returns and maintaining customer service levels.
The challenges Barclays faces on the two sides of the business come together in the UK government’s requirement to ring fence the former with effect from 2019. This raises important governance and funding issues. How can the board of a universal bank exercise the required level of fiduciary control over its retail subsidiary while observing the requirement to ringfence one part of the business? How can the board show that the two parts are funded separately? What implications does this have for the operations of the investment bank?
These are difficult questions, which Barclays’ new senior management will be discussing with each other, regulators and shareholders. They will be doing so in an environment complicated by low interest rates, and poisoned by the cost and distraction of resolving long-running regulatory and legal problems, all at a time of exceptional technological change.
Yet in many ways it is not a bad position in which to be. Both sides of the Barclays business have credible market positions; the bank’s balance sheet is sound; and reshaping a strong business is a quicker fix than rebuilding a weak one. It is easy to see why Mr Staley was attracted to the job.