Barclays shuns government's toxic loan insurance scheme

Published on Monday 30 March 2009 21:36

BANKING giant Barclays last night took the 11th-hour decision to shun the government's taxpayer-backed insurance scheme for "toxic" assets.

In a statement to the stock exchange made after the markets had closed, Barclays argued that going into the scheme would "not be in the interests of its investors, depositors and clients".

Barclays' refusal to take part in the Treasury's Asset Protection Scheme (APS) is in stark contrast to the other major banks.

Royal Bank of Scotland and Lloyds Banking Group have insured risky investments worth hundreds of billions in the scheme after disastrous losses last year.

Barclays move came just days after the bank's finances were given the all-clear after detailed "stress testing" by City watchdog, the Financial Services Authority (FSA).

The announcement came ahead of today's deadline for financial institutions to decide whether or not to take part in the scheme.

In a statement issued last night, Barclays chief executive John Varley said: "In making our judgment about the APS, we have looked carefully at the economics of participation, and we have talked to many investors. This has led us to today's decision."

Barclays has been keen to avoid the move due to the restrictions on executive pay and bonuses which the government would insist on as a quid pro quo for it taking on some of the bank's risks.

Taking part could also have involved the government either taking shares in the bank, or Barclays paying a hefty upfront fee.

As a result of entering the scheme, the government's stake in RBS is set to rise to as much as 95 per cent, while Lloyds will also be majority-owned by the state under terms agreed earlier this month.

Barclays has been shoring up its capital position since the beginning of the year, selling credit market exposures and talking to a "number of interested parties" over the sale of its iShares asset management business.

The bank says discussions over a sale – which could raise more than 4 billion – are "progressing well", while trading so far this year continues to be strong, it claims.

Goldman Sachs is a potential bidder, as are Bain Capital and a consortium of Hellman & Friedman and Apax Partners, according to City sources.

Analysts estimate iShares is worth about 3bn, but bidders could be willing to bid near 4bn, banking industry sources have said.

Last year Barclays raised about 7bn, mostly from Middle Eastern investors, to bolster its capital position.

Barclays shares ended 14 percent lower at 149.1p yesterday, with analysts saying the expectation the bank would not join the asset scheme prompted investors to sell after a recent surge by the stock.

The shares have more than doubled in value over the past three weeks, valuing the bank at over 12bn pounds.

Barclays has repeatedly said it has sufficient capital to withstand a deepening recession and would only join the protection scheme if it made economic sense. The bank has faced intense scrutiny over its balance sheet after being accused of not writing down the value of structured credit assets as much as rivals.

It has continued to sell credit market exposures this year and has done so at or around their carrying values, the bank said yesterday, and is less exposed to souring corporate loans than RBS and Lloyds.

Barclays is also expected to consider joining other banks in offering to exchange low-ranked bonds for higher quality debt to boost balance sheet quality.