Barclays 2009 Annual Report Download - page 23

www.barclays.com/annualreport09 Barclays PLC Annual Report 2009 21
Key points
Banks provide:
– Reliable and efficient payment systems
– Safe storage for deposits and savings
– Maturity transformation
– Asset management
– Investment banking
thousands of mid-sized companies as well – manufacturing and service
businesses which may not be household names but which employ a large
proportion of the UK workforce.
What does ‘financing and risk management’ mean? As I have noted,
there are three activities in an investment bank. The first is providing advice.
This means working with clients to design solutions for their needs, whether
they are financing government debt; raising funds to build a new factory;
raising funds to complete an acquisition; or hedging the risk of foreign
currency, commodity or interest rate volatility to ensure certainty of cash flow.
The second is execution. The investment bank helps clients put in place
whatever solution has been designed, irrespective of who designed it. This
could involve ensuring new equity or debt makes its way from investors to
the company. Banks commit to ensure that such issuance will be successful
by promising to take whatever investors do not. Execution could also involve
structuring a risk management solution by purchasing appropriate
securities and packaging them to meet client objectives. Banks take
risks here to help their clients absorb and manage their own risk.
The third is funding. The efficiency of markets for new issuance
(whether debt or equity) is entirely reliant on the existence of effective and
efficient secondary markets through which equity and debt securities are
traded. Secondary market activity (that is daily dealing in the stock market)
signals investor appetite for different types of transactions; provides clear
benchmarks for pricing and lowers the cost of issuance. Market makers (like
Barclays Capital) play a critical role in maintaining the efficiency of traded
markets by ensuring that clients can always get access to a price and can be
confident that individual markets will be available when they need them.
All three of these activities have clear relevance to the health of the real
economy. If you switch off investment banking, you switch off a
fundamental supply of credit to companies and governments. Our analysis
suggests that global economic growth of 4% per annum (which I would
argue is what the world needs to create employment and relieve poverty
through time) requires global capital markets to grow at twice that rate –
8%. I cannot think of a better way to demonstrate the social utility of
investment banking activity. And if you think of the societal issues that
confront our world – an ageing population, a lack of infrastructure
supporting economic growth, the need for greater health provision, climate
change – broadly based banks with capital markets capabilities have the
skills to help. They help with savings and investment products to support
the privatisation of welfare provision; with financing resource in the areas
of health provision and infrastructure and with trading skills in the area of
the management of carbon emissions.
Regulation in banking
The new regulatory structure will require banks to hold more capital and
more liquidity. There will be a new focus on top down supervision to ensure
that regulators have the tools to manage collective risk (in particular, the
amount of debt) in the system. Products must be simpler and more
transparent. And incentives and compensation must be better aligned to
delivery, must take account of risk, and must be paid out over time. Good
performance should be rewarded fairly. Bad performance should not. This
is something we have always believed.
On compensation specifically, the international agreement on reforms
to the structure of remuneration that were announced by the G20 in
September is a good step forward. The British banks have committed to
implementing those, as well as the new FSA Code on Remuneration. At
Barclays, we have been working on reforming our remuneration practices
since the beginning of this year. Our historical practices were generally well
aligned with the changes afoot, but we are amending where we need to.
This is, though, difficult territory. On the one hand, we must be sensitive
to the views of many stakeholders that bankers are paid too much. On the
other, we have to recognise that talent is not a commodity, and that our
shareholders and customers expect Barclays to field the best people we can
across all of our businesses. We compete in global markets, and labour has,
in my experience, never been more mobile. We will strive to get the balance
right here. Our objective is to pay the minimum compensation consistent
with competitiveness and performance.
Those calling for an age of simpler, old-fashioned, more tightly regulated
banking were probably not around in the days of Bretton Woods or Glass
Steagall. Because if they were, they would remember a time when less than
50% of the adult population in the developed world had a bank account,
when credit was strictly rationed, when a mortgage cartel controlled home
loans and when, with credit supply directed by governments, industry
complained constantly of being starved of funds.
Regulation is a substitute neither for sound judgement nor for a sense
of personal and corporate responsibility. The primary obligation lies with
bank boards. We must keep our sights at all times on what our customers
expect of us (helping them achieve their financial goals and helping them
take appropriate risk); and on what our owners expect of us (that we will
use well the resources generated by running a profitable business). Those
two things, for me, are the essence of responsible banking.
Translated into an operational agenda, a bank which is behaving
responsibly and a bank which is playing its role in society should invest for
the future. It should support appropriate risk taking by its customers. It
should run capital ratios that create confidence. It should employ talented
staff. It should manage its business in a way that enables it to pay dividends
to its shareholders (mostly pension funds on which retired citizens rely).
And it should pay due tax to its revenue authorities.
Success in banking
Success in the banking sector creates good things for society – the
facilitation of wealth creation by customers; the generation of direct and
indirect employment; payment of dividends and tax; economic stabilisation
and growth. But success creates responsibilities, and we must understand
the obligations that go with being a successful bank. We have to make
certain that we use our profits well – in particular, that our contribution to
society recognises society's contribution to our success.
The strands of responsible banking and successful competition are
intertwined. We are, I believe, at our most productive (in an economic and
social sense) if we compete successfully. The capacity of British banks like
Barclays to support the UK economy in the way that I have been describing
depends on the banking playing field being kept level as the authorities here
and around the world make their decisions. Safeguarding existing jobs and
creating new ones and lending supportively to British householders and
businesses (thereby helping create jobs beyond those which exist directly
in the banking industry, itself one of the biggest employers in this country).
Ultimately these things depend on our being allowed to compete on equal
terms with the best banks in the world.
Note
This article by John Varley was first published in The Sunday Telegraph on
15th November 2009.