Written evidence submitted by Barclays
INTRODUCTION
1. Barclays welcomes this inquiry as an important
further contribution to the debate on the future shape of the
banking industry.
2. The Committee's inquiry coincides with a number
of investigations into the banking sector including the Office
of Fair Trading's review into barriers to entry, expansion and
exit in retail banking and the Independent Banking Commission's
inquiry into banking reform, financial stability and competition.
3. Barclays supports measures to promote stable
and competitive financial markets.
4. Banks play an essential role in society by
taking deposits, providing money transmission and credit services,
and enabling "maturity transformation" to take place
which helps households and business absorb financial risks and
uncertainties. In performing this role, banks need to manage their
business in ways which facilitate appropriate risk-taking by households
and business, which do not pose unacceptable risks to financial
stability, which help maintain market and consumer confidence,
and which also support effective competition in the market. The
interaction between these policy goals needs to be acknowledged
and balanced by policymakers. Your review will be important in
exploring these inherent policy tensions and helping ensure that
an appropriate balance is struck.
RECENT CHANGES
IN THE
BANKING MARKET
5. The market has experienced significant change
over the last few years. There has been consolidation (eg Santander's
acquisition of Bradford & Bingley and Alliance & Leicester,
Lloyds TSB's acquisition of HBOS and mergers and acquisitions
in the mutual sector) and foreign players have exited the UK market
(eg the Icelandic and Irish banks). Some pre-crisis business models
have proved unsustainable (usually because of excessive reliance
on wholesale funding). Despite these changes, the landscape remains
competitive and dynamic with the emergence (even during the crisis
and its aftermath) of new competitors, products and customer propositions.
6. New entrants into the retail banking sector
have used a variety of methods to enter the market. These range
from those who are developing full retail banking operations to
compete across a range of products (including current accounts,
mortgages and savings), such as Santander and Tesco Bank; to those
who compete strongly on a monoline basis on one or more specific
product areas, such as ING Direct. We are also seeing new retail
market entrants such as Metro Bank and Virgin and increasing activity
from emerging country banks such as India's ICICI.
7. That said, the scope for product providers
to generate commercial returns from a wider range of offerings
in the current macroeconomic environment is limited. In its 2010
Financial Risk Outlook, the FSA cited the example of the Building
Societies sector where it believes low net margins and a difficult
macroeconomic environment will continue to challenge profitability
in the immediate future, and where competition for retail funding
is likely to remain high, and may intensify further.
IMPACT OF
REGULATORY REFORM
8. Barclays agrees with the need to reform and
strengthen banking regulation and supports the G20 reform agenda.
The extent of change already delivered by Governments, central
banks, supervisors and the industry has been significant. But
there is still more to do.
9. Since the crisis began, Barclays Core Tier
1 capital ratio has more than doubled from 4.7% to 10%, and our
liquidity buffer has increased from £19 billion to £160
billion. Barclays leverage ratio has fallen from 33x to 20x. It
is clear that capital and liquidity ratios have moved to a permanently
higher level as a result of market and regulatory developments;
and that lower leverage (relative to pre-crisis levels) will be
regarded as a key measure of stability going forward.
10. Regulatory barriers both on entry, and on
a continuing basis, are already relatively high (eg capital adequacy
requirements, systems and controls, conduct of business rules,
etc) and are likely to become higher when prudential reforms to
strengthen stability are fully implemented. Whilst these reforms
have attracted broad support, they will make it more difficult
for banks to achieve target returns on capital that are acceptable
to shareholders and, other things being equal, will make entry
into the banking market less attractive.
11. Given the global nature of banking, it is
vital that a level playing field is maintained to avoid regulatory
arbitrage and competitive distortions. The British banking industry
will best serve British households and business (and thereby contribute
to the UK economy) if it is able to compete on equal terms. Prudential
reforms need to be implemented to broadly equivalent standards
and timescales in different jurisdictions. This is important both
within Europe (eg harmonised implementation of Basel 3 and CRD
4, including the approach to discretionary measures) and also
between the EU and the rest of the world, notably the US. It is
also important that prudential requirements do not introduce competitive
distortions between types of financial institution (the risk here
is pushing risk currently being taken by regulated financial institutions
into unregulated territory).
STABILITY IN
A COMPETITIVE
WORLD
12. Barclays believes that diversity by business
model, type and size of banks is a source of resilience to the
financial system and of advantage to customers and clients. A
broadly based industry increases the capacity of the overall system
to absorb risk. An industry made up of small, narrow banks is
less resilient (witness the Cajas and Landesbanken
communities in Spain and Germany) and poses more risk to financial
stability than a mix of banks of different sizes and with different
business models.
13. We see a number of specific benefits in the
business model we follow. Our range of service and product capabilities
allows us to respond strongly to the needs of customers. Our experience
over time suggests that broadly based banks are more resilient
to shocks and unexpected changes in market conditions. Barclays
universal banking model has demonstrated its ability to be a risk
diversifier during the current crisis (aggregate pre-tax profits
generated by Barclays since the crisis began in Summer 2007 up
to and including first half 2010 amount to some £25 billion).
14. In addition, firms that have a large deposit-holding
business (in proportion to their overall size) are likely to find
it easier to meet capital and liquidity requirements under a wider
range of stressed circumstances than other firms. During the credit
crunch, those institutions with a narrow funding model (particularly
those relying on securitised and wholesale markets to fund assets)
suffered immediate impact from the closure of the wholesale markets,
which had devastating consequences on their liquidity and capital
position.
15. It is important to the sound working of competitive
markets that large complex banks can recover, be rescued, or allowed
to fail in an orderly way without recourse to taxpayer funds.
Barclays fully supports the development of recovery and resolution
plans, and is fully engaged with the ongoing work by the authorities
to develop better coordinated and more effective crisis management
regimes for cross border banks.
COMPETITION AND
CUSTOMERS
16. Competition for market share of different
banking products delivers choice for consumers and has made the
UK banking market one of the most innovative and customer centric
in the world. An appropriate framework for regulation and competition
should support a market in which customers can shop around for
a range of banking products and secure them on terms that benchmark
appropriately with international standards. Research has shown
two things: that a customer in the UK is likely to hold a range
of financial services products sourced from different providers
(much higher concentration of suppliers is observable in most
other markets); and that for those who hold a credit balance on
their current account, the cost of a basket of retail products
in the United Kingdom is considerably lower than the equivalent
in most developed markets.
17. Low levels of current account switching are
perceived, by some, as evidence of a lack of competition. However,
actual switching data only present part of the picture as the
European Commission recently found.[28]
In reality many UK customers multi bank; the average UK customer
holds two current accounts. Barclays was pleased to participate
in the recent OFT market study on switching bank accounts which
addressed how the switching experience for customers could be
improved. For switching to be hassle-free, it is important that
direct debit originators also play their part and amend their
records as appropriate.
18. Simplicity, transparency and reliable customer
service are key to empowering customers and enabling them to shop
around and choose the product that is right for them. Barclays
works closely with consumer groups, regulators and competition
authorities to develop products which meet both our customers'
needs, and the requirements of our regulators. For example, our
basic bank account (designed to help those outside the banking
system gain access to it) was developed in conjunction with consumer
representatives and is viewed as one of the best in the market.
We have nearly one million such accounts. In 2008 we introduced
new current account products with a Personal Reserve in response
to customer needs for certainty, simplicity and transparency.
In 2010, the OFT's report on current accounts[29]
set out its ideal model for a current account service, which Barclays
Personal Reserve meets in almost every respect.
19. Comparative information can be important
in helping consumers make informed choices, but we think it should
be developed in the right way to ensure that it is additive and
not misleading. The OFT has successfully worked with banks and
consumer groups to improve transparency, and over the next 12-18
months banks, including Barclays, will:[30]
- introduce an annual summary of the cost of their
account for each customer, which will help them to identify more
clearly the value they are getting in a similar way to annual
car or house insurance renewal quotes; and
- provide average credit and debit balances, which
will help consumers to estimate the potential benefits of switching
bank.
20. Banks have already produced and published
illustrative scenarios showing unarranged overdraft charges, giving
consumers an idea of the costs for different patterns of use.
21. The UK is unique in operating a "free
if in credit" current account business model (eg no charges
for ATM withdrawals, online and telephone banking, direct debits,
standing orders, mobile banking and most routine transactions).
The model is popular with many consumers and attempts by some
banks to move to alternative business models have failed to attract
support from consumers or representative organisations. We recognise
the commercial difficulties facing any market participant seeking
to move from such a business model.
22. The provision of banking services to SMEs
has also been the focus of a number of inquiries.[31],[32]
Barclays and the other main UK banks gave pricing and behavioural
undertakings to the Competition Commission in 2002, which were
reviewed by the OFT in 2005. Behavioural undertakings and price
change reporting to OFT remain in place. However, the Competition
Commission and OFT considered the market to be sufficiently competitive
to remove the pricing undertakings in October 2006.
23. As with retail banking, the SME market has
continued to evolve with online banking providing an important
new channel since the last competition review. Barclays and other
providers now provide the option of online accounts at cheaper
cost to SMEs. Here, too, new entrants have changed the market
through the introduction of innovative products and services.
For example: PayPal has become a popular online payments services
provider, used frequently by online businesses; Ford offers asset
finance on some of its vehicles; the Bank of China has entered
the market for buy to let mortgages; Weatherby's provides full
service money transmission SME banking with no branch network;
and Travelex, Hi-FX and FX-Moneycorp provide foreign exchange
services.
24. The wholesale market was heavily affected
by the withdrawal of foreign lenders at the height of the financial
crisis. However, Barclays has continued to lend actively to creditworthy
corporate clients and businesses in all segments throughout the
last three years.
25. Our investment banking activities play a
vital role in enabling us to deliver a full relationship banking
service to clients, helping businesses to raise capital, bringing
companies to the market for the first time, advising on risk management
strategies, and so on. The breadth and depth of Barclays offering
to clients has developed in response to the changes in client
need. Barclays Capital provides large corporate, government and
institutional clients with advisory, financing and risk management
services. The presence in wholesale markets of large, sophisticated
counterparties and competitors ensures vigorous contention for
business, a diversity of product offerings, and constant service
improvements. In common with many of its clients and competitors,
Barclays Capital operates on a global basis.
26. Innovation is an integral part of our business
strategy. For example, Barclays Capital acted as joint bookrunner,
underwriter and adviser to Resolution plc on its recent rights
issue. The rights issue is partly financing Resolution's acquisition
of certain of AXA SA's UK risk and pension insurance businesses
for a total consideration of £2.75 billion. Barclays Capital
helped put in place an innovative fee structure, aligning risk
and economic reward, which delivered a strong message of support,
lowered overall costs, and provided a greater allocation of fees
to shareholders.
27. Since the start of 2009, Barclays Capital
has been involved in more than USD 260 billion of equity underwriting
and played a role in over USD 2,000 billion of debt underwriting
for public and private sector clients.[33]
This is essential, real economy work.
CONCLUSION
28. Despite the changes in recent years, the
banking market remains competitive and dynamic with the emergence
of new competitors and new products and services for customers.
29. Whilst we welcome the focus on strengthening
the regulatory regime in the UK, the EU and internationally, we
look forward to the final determination of the optimal reform
package. This will help give clarity and certainty to customers
and investors and allow us to focus on our core purpose: fuelling
sustainable economic growth in ways that deliver appropriate returns
to shareholders.
September 2010
28 http://ec.europa.eu/competition/sectors/financial_services/inquiries/retail.html Back
29
http://www.oft.gov.uk/shared_oft/personal-current-accounts/oft1216.pdf Back
30
http://www.oft.gov.uk/news-and-updates/press/2009/122-09 Back
31
http://www.competition-commission.org.uk/inquiries/subjects/banks.htm Back
32
One difficulty which has been encountered, is to arrive at a definition
of SME banking. The UK competition authorities use turnover of
up to £25m to define an SME, however, Barclays does not have
an "SME division" as such, but segments customer groups
broadly on the basis of where the mass market, covered by UK Retail
Banking, ends and bespoke services, covered by Barclays Corporate
banking, begins. Back
33
Source: Dealogic Back
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