As Euromoney has reported, the bank aims to cut legacy and other RWAs of £75 billion for a 2015 balance of £440 billion of RWAs after CRD IV implementation, with a common equity tier 1 ratio above 10.5% by 2015. It hopes this will allow a progressive dividend policy from 2014, eventually targeting, over an unspecified period of time, a 30% payout ratio. However, the perverse reaction of equity investors to Deutsches equity dilution with the shares trading up by 6% suggests investors place a premium on well-capitalized banks amid the bombardment of new regulation, which might force Barclays to speed up its capital plan. Whats more, in addition to facing market demands to beef up its core tier 1 capital, Barclays faces a headache in boosting the capitalization of its US broker-dealer unit, which would need to be structured as an independently-regulated entity in the US. While its not fully clear how foreign banking operations of European investment banks in the US will be treated in the final designation of the rule, the draft proposal envisages that the broker-deal unit will be subject to a US leverage ratio, which some analysts speculate could be in the region of 5%, possibly netted for derivatives, compared with the current unadjusted Basel III proposal of 3%. In this case, while the independently regulated bank holding company meets the US capital requirement, Barclays broker-dealer unit in the US faces a severe capital shortfall with a 2.4% leverage ratio, implying an $8.2 billion shortfall in the event a 5% leverage ratio becomes binding, according to Nomura.
Says Joshi: More than two thirds of the assets within the entity are collateralized agreements, and prima facie appear to be low-risk operations. If such a demand were to be made, Barclays would undoubtedly consider its options [say] to try to net off such operations or search for another solution. What impact this could have on earnings remains a key uncertainty, and there is always a risk that such reduction of activities could have friction costs as well. In addition, if funding would also be required to be ring-fenced, this would be an added cost. One European bank analyst strikes a more sanguine tone: Barclays is already engaged in a strategic review but they now need to re-think their business structure in US. The board could consider down-streaming capital under the bank-holding company level to the broker-dealer unit. The structure and time-scale for this should be manageable but this new regulation clearly complicates Barclays international strategy.
And there is the rub. After unveiling an ambitious turnaround strategy and ROE goals, the last thing CEO Antony Jenkins' needs is more risks to earnings, uncertainty over the direction of the bank's US investment banking arm core to its global footprint - and market pressures to accelerate capital accumulation.