Barclays disclosure of size of its capital shortfall highlights need for banks to provide transparency

At the same time that Barclays disclosed it was planning on raising capital by issuing more shares, it also disclosed that it faced a far larger capital shortfall than the market anticipated.

Regular readers know that bank capital is an easily manipulated accounting construct.  As an accounting construct, it is the balance sheet account through which losses incurred by the bank flow.

Barclays' disclosure reveals just how easy it is for a bank to manipulate its book capital level by deferring the recognition of losses.  

Since the beginning of the financial crisis on August 9, 2007, financial regulators have let banks like Barclays defer recognition of losses.  First, there is the policy of regulatory forbearance that allows the banks to engage in extend and pretend and turn non-performing loans into zombie loans.  Second, there has also been the suspension of mark-to-market accounting so securities are held on the balance sheet at acquisition cost and not their current value.

From Jill Treanor at the Guardian,

The size of the cash call on investors – in the form of a rights issue, which will be launched in September – is bigger than expected and follows a request by the Bank of England that it meet a new measure of financial health, known as the leverage ratio. Barclays shares were volatile in early trading, falling around 6% to 290p after the larger-than-expected rights issue was announced. 

"After careful consideration of the options, the board and I have determined that Barclays should respond quickly and decisively to meet this new target. We have developed a bold and balanced plan to do so," said Jenkins, who was promoted to chief executive only 11 months in the wake of the Libor-rigging crisis. 

The size of the capital gap identified by the Bank of England of £12.8bn is almost double the amount the City had been expecting ....

By disclosing that it has a far larger capital shortfall, Barclays raises the question of what other losses are hidden on and off its balance sheet?

The only way for the market to know for sure is if Barclays discloses its current global asset, liability and off-balance sheet exposure details.  Without this level of disclosure, Barclays is effectively waving a big red flag in front of the market and announcing that it is still hiding losses.

Confirmation of this comes from a Bloomberg report,

“If you’re doing a rights issue, then you have to clear the decks and present investors with a clear balance sheet,” said Mike Trippitt, a London-based analyst at Numis Securities Ltd. who downgraded Barclays to sell this month in anticipation of a rights offering. 

“You can’t do a rights issue and then follow it up with additional provisioning in the next quarter. My only concern is that they haven’t done enough.”