Barclays chief executive CS Venkatakrishnan has pledged greater vigilance after the bank suffered two high-profile blow-ups in shadow banking within six months. The bank is now constraining lending to certain structured finance counterparties with vulnerable business models and weak financial controls. This raises the question: what was the bank doing before? Critics argue that it should have avoided lending to high-risk outfits with large mortgage exposures and small audit firms in the first place.
The impairment charge for Market Financial Solutions (MFS), which collapsed in February amid fraud allegations, was £228m. Last year, Barclays took a £110m hit from US sub-prime auto lender Tricolor, also involving fraud claims. Despite these setbacks, the bank's first-quarter pre-tax profits rose 3% to £2.8bn, which Venkatakrishnan called a solid quarter. Barclays maintained its £500m share buyback plan.
Overall credit impairment charges increased to £823m from £643m a year ago, partly due to MFS. However, this rise is not alarming, and the bank's bad debts remain manageable. Banks take risks, and alleged frauds occur, but two incidents do not signal a credit cycle ending in tears.
Yet, caution is warranted. Shadow banking and private credit are complex, opaque, and leveraged, causing concern for central bankers who struggle to monitor unregulated activities. If private credit calamities multiply or merge with lending stresses from the Middle East conflict, the situation could become hairy. For now, Venkatakrishnan sees no credit weakness in the UK, US consumer business, or corporate lending. However, a sustained oil price around $110 a barrel could deteriorate the picture. As long as no more cockroaches like MFS and Tricolor appear, Barclays' starting position remains solid.
