Barclays may reject Asset Protection
You don't have to be a Barclays shareholder or customer to be relieved that the blue-badged bank has been told by the Financial Services Authority that there's no pressing need for it to raise substantial amounts of new capital.
The FSA, in collaboration with the Bank of England, devised a so-called stress test that looked at what would happen to Barclays on a series of not-quite-Armaggedon scenarios, including three consecutive years of recession.
Unless you believe that the FSA is run and staffed by reckless numpties, it's reassuring that the City watchdog believes that Barclays should be able to withstand more-or-less whatever the enfeebled global economy throws at it, without crumbling.
And, I suppose, if the economy were to perform even worse than the hypotheses for this financial war game, well we'd be worrying about a good deal more than just the health of Barclays.
Which means that Barclays has discretion over whether to participate in the Treasury's Asset Protection Scheme: whether to purchase insurance from us, taxpayers, against future losses on some of its less magnificent investments and loans.
The board of Barclays will make the decision in the coming 48 hours. But my sense is that it will turn down the offered insurance.
1) the financial price paid by Lloyds Banking Group and Royal Bank for the cover looks exceedingly high to Barclays;
2) there's a less tangible perceived cost of insuring with taxpayers, in that it would give the Treasury a further mandate to meddle in Barclays' affairs, which could be detrimental to the wider interests of its owners and customers.
If Barclays does take up the insurance - and, as I say, that looks unlikely - it would insist on paying for the cover in cash, rather than shares.
It would use the £4bn to £5bn of proceeds from the coming sale of its iShares investment business, to pay the fee - which would buy it protection on perhaps £30bn to £50bn of impaired assets.
In the context of Barclays £2006bn in total assets, that level of cover might be useful but it would not transform investors' perceptions of the strength of the bank.
A better use for the iShares proceeds might be to put it to work in some old-fashioned banking.
It may seem odd to say this, but in some ways there's not been a better time to be a bank than right now: banks are paying out almost nothing to those who lend to them (depositors like you and me, for example) and are charging anything between 4 per cent and 20 per cent for mortgages, personal loans, corporate loans, and so on.
Or to put it another way, margins for banks are at record levels; they are spectacular. So there's a strong argument for Barclays simply deploying the capital generated from the iShares disposal to make lots of lovely, highly profitable loans.
In fact once we're through the recession, once banks have incurred all the losses on their reckless and imprudent lending of the bubble years, they'll probably be vulnerable to the charge that they're making excessive profits.
But that's for tomorrow.
Right now, there's still a question about whether the banking system as a whole - in the UK and globally - has sufficient capital to withstand whatever future shocks may be generated, as the tidal wave of recessionary forces holes industries and national economies, from insurers through to Eastern Europe's over-borrowed nations.
As George Soros - the hedge-fund legend - points out in today's Times, the UK is peculiarly vulnerable to these potential shocks, because our banking system is so large relative to the size of our economy.
You'll recall that I've hitherto highlighted that the foreign currency liabilities of our banks quadrupled over the past decade or so to around £4,400bn, or a bit more than three times our GDP, the value of everything we produce.
It means that the credit-worthiness of the UK is inextricably linked to the credit-worthiness of our banks, especially since so many British banks have been wholly or partly nationalised.
If, for whatever reason, confidence in our banks evaporated again in the way that it did last October, that - as Soros says - could undermine the Government's ability to borrow (although he does say that he currently thinks it unlikely the UK will need to be bailed out by the International Monetary Fund).
Which, as I say, is why we should all be reassured that the FSA believes that one of our very biggest banks, Barclays, has the resources to cope with almost the worst economic conditions that we can conceive.