Barclays’ Diamond argues case for universal banking

Barclays' chief executive Bob Diamond adamant bank’s model funds cheaper lending and is less risky

Bob Diamond, the chief executive of Barclays Bank, has parried claims that combining retail with investment banking threatens financial stability, saying the universal model not only enabled banks to lend for less, but was also less risky.

In an at-times testy hearing with British lawmakers from the influential Treasury Committee on Tuesday, Diamond said: "Our business model of universal banking is a good starting position [for avoiding failure]. It's good for diversifying clients, deposits and funding sources."

He added: "An integrated universal banking model gives us far greater financial stability because it gives us funding sources from a broader geographic reach. We see that reflected in our funding spreads, which in turn gives us greater capacity to lend on favourable terms."

Diversification through the combination of functions such as retail and investment banking is acknowledged to lessen the risk to individual institutions. However, many contend the crisis has highlighted that the universal model is more of a threat to the stability of the system as a whole, as it increases the number of interconnections between financial institutions. This means the collapse of a significant industry participant can have greater repercussions for the system as a whole than if firms tended to focus on specific types of banking activity.

Diamond fended off such concerns, however, saying: "If you look at the failures in the UK – of HBOS [Halifax Bank of Scotland], of RBS [Royal Bank of Scotland] – there was no rogue trader, no derivatives, no proprietary trading. It was all vanilla lending. It was a lack of risk management that caused the problems."

When quizzed on whether subsidiarisation of banks' activities – a strategy employed by rival bank HSBC – could lessen systemic risk, the Barclays chief executive was again sceptical. "Subsidiarisation is a very broad term, but applied strictly it would have the same impact as separating retail and investment banking. However, if you look at Barings, it applied such a model, and when the problems occurred with its Singapore subsidiary, that did not prevent its failure. We have to focus much more on the implications of funding models," he said, adding that subsidiarisation would have implications for the capacity and cost of lending.

Andrea Leadsom, a committee member, later corrected Diamond on Barings, saying that the bank's collapse resulted from the subsidiary's borrowing of "limitless sums of money" from the London office. "It was a cock-up," she said.

With the UK in the midst of a fiscal retrenchment, a furore has emerged over bankers' bonus payments and some of the lawmakers at times could barely contain their ire for the Barclays chief executive, with John Mann particularly combative.

Diamond argued that, while the government had a right to interfere in institutions that were majority state-owned such as RBS, payments made by banks such as Barclays were no matter for lawmakers. Diamond refused to acknowledge that Barclays had benefited indirectly from taxpayer aid given to rival lenders RBS and HBOS – now Lloyds – saying the bank "did not put the system at risk" and flagged that there was a difference between "a direct bailout" and central banks' provision of greater amounts of liquidity, which he was "grateful" for. He claimed bankers had been sufficiently "apologetic and remorseful".

The chief executive was sketchy on the bank's remuneration practices, claiming that neither he nor Antony Jenkins, the chief executive of global retail banking who flanked Diamond at the hearing, knew how the bank's bonuses were split between employees, saying only that the investment banking arm, Barclays Capital, likely garnered the "majority" of what was on offer. Andrew Tyrie, the committee chairman, called on Diamond to reply in writing to lawmakers with the specifics.

Diamond was also vague on the degree of information on bonuses provided to the bank's shareholders, refusing to be drawn on whether shareholders were aware of the amount and structure of the payouts in advance of them being determined, saying only that shareholders were "very involved in terms of our philosophy [on pay]."

Diamond claimed the Prime Minister and the chancellor of the exchequer had not "looked him in the eye" and asked him to show restraint in the latest round of bonus payouts. George Osborne, the chancellor of the exchequer, told parliament on Tuesday the government was in discussions with banks to pay smaller bonuses than they otherwise would have done and for them to "lend to the British economy". Diamond pinned the blame for weak lending to British businesses on anaemic demand, and claimed that British lenders such as Barclays had picked up the slack that had occurred following a withdrawal of foreign lenders from the UK market. More small business loans were being approved than before the crisis, he said.

 

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