A calm, confident Robert Diamond discussed financial restructuring in Europe and economic options for the Chinese government during a June 14 interview—thirteen days before the British bank where he serves as CEO, Barclays Group, was fined for manipulating interbank lending rates.
Diamond gave no hint of the trouble brewing at Barclays, where from 2005 to 2008 he headed the bank division linked to what regulators say was a scheme to fix the benchmark London Interbank Offered Rate and the Euro Interbank Offered Rate.
Britain’s Financial Services Authority fined Barclay’s 290 million pounds, and Diamond has been forced to forfeit his 2012 bonus. Meanwhile, regulators in the United States, Europe, and Japan are investigating several other banks.
Diamond flew to Beijing for several days of private meetings with Chinese clients and government officials, including investment and central bank officials. He also addressed the press.
China is one of more than fifty countries served by the London-headquartered bank, Britain’s second-largest lender by assets. It’s also strong: Barclays was one of the few banks in Britain that turned down government monetary support during the 2008 financial crisis.
Diamond told Caixin that he does not expect the Chinese government to unleash a 2008-style economic stimulus package now that its economic growth rate is falling. But he expects the government to step up spending on infrastructure.
In Europe, Diamond said, financial institutions are likely to undergo restructurings that reward investors with high, mid-term yields. He also expects the introduction of eurobonds.
Diamond was a bond trader at Morgan Stanley before joining Barclays in 1996. He’s best known for brokering Barclays’ acquisition of the bankrupt American investment bank Lehman Brothers, which failed during the 2008 crisis, for just US$ 1.75 billion.
Barclays rewarded Diamond by naming him CEO in 2011. Excerpts from the interview follow:
European Crisis
Caixin: The euro crisis has pushed Europe’s banking systems to the edge of a cliff. How can Europeans improve their banking regulations?
Robert Diamond: Some say that a number of banks across Europe, not all of them, were slow to ... increase the amount of equity, particularly real equity, reduce the amount of leverage, and improve the safety of the bank by carrying more liquidity.
All of these things are stipulated clearly in the full implementation of Basel III. But prior to the implementation of Basel III, in some areas of Europe, both the governments and the banks were slower to react relative to the U.S. and the UK. I think it’s fair to say that more change will occur across continental Europe in the financial services industry.
I think the administration in Spain, for example, both the prime minister and the finance minister, are trying to address this with the actions they’re taking in terms of further consolidation, particularly in the caja (savings banks) area, more recognition of the value of assets on the balance sheet which will ultimately allow them to have higher levels of equity, lower levels of leverage, more safety, and more liquidity.
The goals have been the same from the beginning: How do we make banks safe and sound, but also how can banks help the economy create jobs and create economic growth. And how do we do that in a way so that amongst G20 countries there is a level playing field?
Spain has moved forward aggressively under the new administration, and we should see how this plays out. But it looks like we’ll have a significantly more consolidated system.
Caixin: There has been much discussion recently about introducing eurobonds. But Germany does not support the idea. Do you think eurobonds will be issued?
Diamond: I come from the optimistic camp. I believe in the underpinnings of the single currency that began in 1947 with the European Steel and Coal Community, with the recognition after two world wars that Europe needed to integrate their currencies and commodities more closely together to compete globally. This is an economic initiative which now needs closer fiscal integration and closer political integration to be successful.
China’s Economy
Caixin: London aims to be an offshore hub for the renminbi along with Hong Kong and Singapore, even Tokyo. What are London’s advantages and disadvantages compared to other markets?
Diamond: I think London sees itself as an extension of Hong Kong, not a replacement. Hong Kong will be the center of offshore renminbi. A lot of the infrastructure will be there and London will be able to leverage off that.
Relative to the other potential offshore centers, London has a time zone advantage, relative to the Middle East, relative to Africa. We’re doing a lot of renminbi business in South Africa on our electronic platform, BARX. This is important because of the trade flows between China and Africa.
(Another advantage is) London’s reputation as a financial center and the depth of investors, from hedge funds to pension funds to fund managers. Lastly, there are the classic London advantages of the English language, the infrastructure of Canary Wharf, and a very strong legal system.
Many African companies operate through our electronic platform, which is run out of both Hong Kong and London. Singapore might have Southeast Asia advantages. Hong Kong has a clear advantage as being part of mainland China. But clients have businesses all over the world. They want seamless transaction capability, whichever time zone they’re in.
Caixin: What is the relationship between the development of offshore renminbi markets and China’s economic growth?
Diamond: The move towards further liberalization and the offshore renminbi market both in Hong Kong and in London are important and substantial. We’ve done a number of offshore, dim sum bonds in the last few days. The volumes are clearly not what one could do in the dollar-based global capital market, but it’s very early. There’s real, serious investor interest in the renminbi.
Caixin: China has more than 3 trillion dollars in foreign exchange reserves. Now that U.S. Treasury bond interest rates are low and the European market is risky, what advice do you have for China’s central bank and investment banks?
Diamond: There is a dearth of any return to risk-free securities. Historically, even U.S. Treasury bills would have some return to them, so there was always a port in the storm. What’s difficult today is that there are very few ports in the storm.
I can’t tell you my advice because I plan to be spending time with both of them this week giving them my advice personally. I think it’s a very challenging investment environment. Now, that means by definition that there is great opportunity.
Over time, credit in Europe is going to be a great opportunity. It’s not going to be right away. But if I’m correct—that we’re going to see a significant restructuring of many financial institutions across Europe—these institutions have to become more focused on their core businesses.
And with much higher capital levels, they have to drive returns above the cost of equity. They’re going to have to get out of the peripheral businesses and exit assets that don’t have those returns.
If we have a large number of institutions shedding assets that don’t have those returns, they’ll be available at a good return to an investor. That’s one of the ways I will certainly be recommending—to look at the opportunities that come from the credit markets across Europe. But not in a one-day type of thing, not “I have an offer right now,” but in terms of focusing on it for the next one, three, five years.
Huo Kan is a Caixin staff reporter. Lilian Rogers is an intern researcher at Caixin.