* 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
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
"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
"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
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
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
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.