Scaling down banks won't make them safer, says Barclays

9 February 2010

The chief executive of Barclays has played down US proposals to make the financial system "safer" by scaling down the size of the banks and stopping them from carrying out riskier trading activities.

John Varley told the Treasury Select Committee that a curb on banks' abilities to carry out proprietary trading, run hedge funds or invest in private equity, would not have stopped the financial crisis.

He also dismissed the move to make banks smaller and narrower in focus.

"There is no correlation between the size of a bank and failure," he said. "Big banks have tended to be more stable in history. Big banks are not aggregators but diversifiers of risk. The system would not be sound by making big banks smaller. The system would be sound by making big banks safer."

Varley, one of the biggest defenders of combining retail and banking operations, claimed the "asymmetrical" cycles of the two businesses give banks resilience and diversification.

"It has happened in previous times in my career that in a time retail banking is suffering, the investment banking system is performing well, and vice versa," he said.

Varley also maintained that risk-taking within investment banking is essential to delivering the returns expected by investors which could otherwise prove detrimental to the sector. However, he added that Barclays has never funded its fast-growing investment arm Barclays Capital from retail deposits.

The 52-year-old banking boss is just one of a number of chief executives appearing in front of the Committee as part of its "too important to fail" inquiry to suggest reforms of the financial system.

The Financial Services Authority has already introduced living wills, which will allow banks to be wound up smoothly in case of their collapse. Barclays is one of the guinea pigs for this initiative.

Varley welcomed the need for reform within the sector but warned that a burden of over regulation would hurt the sector. He struck out at the US breaking from the crowd with its plans drawn up by former Federal Reserve chairman Paul Volcker.

"We need convergence rather than independence of regulatory direction. A big member of the convoy has left it and gone its own way. That is bad for the world."

Barclays emerged from the financial crisis in a stronger position than many of its rivals who were forced to accept government lifelines. Although Varley did not give any indication of the bank's forthcoming financial results, due on 16 February, bad debts are expected to come in £9 billion for the year.

Add new comment