Barclays pays steep price for PRA change of plan
* Bankers criticise PRA for moving regulatory goalposts
* Tier 2 CoCos fail to prevent costly rights issue
* Regulator applies more lenient approach to bank's rivals
By Aimee Donnellan
LONDON, Aug 2(IFR) - Barclays is paying a hefty price for inconsistent regulatory rules that are forcing the bank to raise expensive capital in order to satisfy an unexpected shift in focus towards leverage ratios.
Barclays announced plans to bolster its balance sheet this week with a GBP5.8bn rights issue and GBP2bn of Additional Tier 1 (AT1) capital, after it fell short of the 3% minimum leverage ratio set by the Bank of England's Prudential Regulation Authority.
The PRA's edict, which left the UK bank with a GBP12.8bn capital shortfall, shocked the market, which until now believed USD4bn worth of Tier 2 total write-off dated bonds, issued in November 2012 and April this year, had given Barclays a sufficient buffer to avoid having to raise equity.
"The PRA has really shafted Barclays," said a London-based capital expert.
"They've moved the goalposts in the middle of the game, and I think if Barclays had known that these expensive CoCos wouldn't be included in the most important metric of capital assessments they wouldn't have issued them."
In effect, Barclays paid a huge premium for instruments that have the same capital value as vanilla Tier 2 bonds, which do not have the added complexities of triggers, write-down or conversion structures.
"Barclays paid nearly 3% (280bp) over what it could have for a vanilla Tier 2 bond and it's certainly not clear whether or not it's better off than RBS, which went for straightforward subordinated debt," said banker said.
Although the CoCos qualify as Pillar 2 in a stressed situation, they do not count as regulatory capital for the all-important leverage ratio - the amount of core capital that all banks have to hold in reserve against the total sum of loans they have made.
"The PRA appears to be telling the UK banks to structure their Pillar 1 Additional Tier 1 instruments such that they meet the PRA's expectations rather than the more investor-friendly CRR requirements," said Emil Petrov, head of capital solutions at Nomura.
If they don't do so, they could run the risk of some form of 'penalty', presumably in Pillar 2, he said.
The PRA took over from the Financial Services Authority in April of this year, but it was the latter that pressured Barclays to raise capital in the first place. The general view among market participants is that Barclays chose to sell an aggressively structured contingent capital product instead of an expensive rights issue.
Barclays declined to comment.
Hybrid specialists say that regulators are treating Barclays much more harshly than other UK banks, noting that RBS has been allowed to issue Tier 2 bonds, while Nationwide was given a two-and-a-half-year extension on its capital plans.
Barclays has just one year to plug its hole, even though Basel has set a 2018 deadline for banks to have 3% equity to total assets.
However, a spokesperson for the Bank of England denied that the bank was unfairly treated.
"Any suggestion that the Bank of England singled Barclays out is completely wrong. The Bank of England analysed eight financial institutions and exposed capital shortfalls in relation to the leverage ratio in Nationwide and Barclays," he said.
Barclays has been caught out by its failure to anticipate that the PRA would place such a strong emphasis on leverage ratios. But then few in the market did.
Up until the beginning of June, banks had assumed that regulators would continue to analyse a bank's ability to withstand another crisis based on its total capital reserves - and in that sense Barclays looked to be covered.
Barclays had a total capital ratio of 17.4% as of June of this year, but earlier this year the UK bank, along with Deutsche Bank, Credit Suisse, UBS and Societe Generale was well below the 3% leverage ratio requirement.
Barclays will sell GBP2bn worth of Tier 1 bonds in tranches before June of next year, following successful lobbying efforts. These instruments will now count towards the leverage ratio despite the fact they are cheaper to issue than equity.
"The Additional Tier 1, with the PRA's super-equivalant requirement of a 7% trigger, is now also being confirmed as being eligible capital for the UK's version of the leverage ratio," said AJ Davidson, head of hybrid capital and balance sheet solutions for EMEA and Asia-Pacific at RBS.
The timing, though, is not ideal, as Barclays will be coming to market at a time when banks are expected to flood the market with similar deals as tax clarity emerges on AT1 across Europe.
That may mean, once again, Barclays will have to pay up.