Safer, not smaller, the way ahead for big banks

Published on Tuesday 9 February 2010 20:23

MAKING big banks safer rather than smaller was the best way to safeguard the financial system, a top British banker told MPs yesterday.

John Varley, chief executive of Barclays, admitted to the Treasury select committee that trust had broken down between the wider banking sector and the public in areas like lending and bonuses.

Challenged on whether some financial groups had become too big to fail, Varley argued bigger banks were more effective at spreading risk – with greater volatility among smaller players.

Varley said: "The system will not be served by making big banks smaller, the system will be served by making big banks safer.

"Artificial constraints on bank balance sheets are not the right way to solve the problems we have experienced."

Varley said the economy depended on banks being prepared to take risks and lend. "Swamp them with capital requirements and they will not be able to step up to the plate," he added.

His comments come as regulators across the world weigh up changes such as extra capital and liquidity restrictions for banks to avoid more taxpayer bail-outs – as well as potentially splitting retail banking from riskier investment banking.

Barclays managed to avoid taking taxpayer cash by raising billions of pounds from the Middle East during the sector crisis.

Varley said the bank had doubled its core tier one capital ratio – a key measure of financial strength – in the past two years.

Looking ahead, Varley said: "If we look at the sector as a whole, trust has broken down between the banking sector and the public.

"I think we will be judged on two things, one is how we lend and the other is how we pay."