Zero rates destroying banks: Jes Staley, chief executive, Barclays

Even if Brexit is a reality, the global financial sector may survive given the pledge of the Group of 20 (G20) nations to ensure there is no protectionist wall when it comes to finance, says Jes Staley, chief executive at Barclays. The market may be in for a shock when it comes to interest rate increases by the US Federal Reserve, he tells ET, in an interview. Edited excerpts:

As the CEO of a financial institution which could face the maximum impact of Brexit, what is your assessment of UK’s move?
The vote to leave the European Union is clearly a major political moment and one that created a political crisis in Europe and a challenge in the UK. It’s a major statement geopolitically that the fifth largest economy in the world is leaving an economic union and is going to be a challenge for the G20 and the major economies of the world deal with that. A lot of economic prosperity globally, including in India, has been a function of economic integration globally, but the benefits of that have not been felt by all parts of society. So there’s a challenge now where I think the benefits of globalisation need to be felt more broadly if the political vote does occur elsewhere.

How does it change the global financial landscape?
One of the most important agreements reached by the G20 post the financial crisis was that they needed to re-regulate the banking industry. They, essentially, agreed that they would not use new regulation to create protectionist walls to hold back global capital markets. Our hope is that understanding with the G20 to not create protectionist barriers will continue despite the Brexit vote. London is important in many ways and that’s not going to go away. So, I think, with the concentration of capital in London and the G20’s desire to not create protectionist barriers, the UK will find a way for banks with branches in London to remain competitive in the global capital markets.

What about the fears of job losses?
The regulatory rules that we face have changed a lot. So, in the US, we had to create a whole new subsidiary to execute our US business which we created and it started operating on July 1 this year. In the UK we had to create an entirely new bank to meet the rule around ringfencing and the retail bank from the rest of Barclays. We created a whole new division called Barclays UK to recognise that new legal construct. So, in many ways, we faced challenges in terms of how we are structured legally in the US, UK and now we may face a similar challenge in the EU. I think that London will remain a financial centre and I don’t see right now the need to export jobs to another location.

There is a fear that some European banks will go down in the next few months and it will be 2008 once again. What do you think?
In 2008 the problem of the banking industry was lack of capital and mispricing of risk. Today, most of the banks across Europe have plenty of capital and are properly pricing risk. The challenge is that banks are not sufficiently profitable to have an unfettered access to capital; that’s not healthy. Now that we have gotten banks sufficiently capitalised with the exception of Italy, they are not sufficiently profitable. That has to change. Banks have to manage themselves differently, price accordingly, and there has to be more stability in the regulatory framework facing banks.

Central banks across the globe are going zero or negative on interest rates. How do banks manage that?
It’s difficult to run banks with extremely low rates and in some instances negative rates. There is a growing scepticism about the effectiveness of zero interest rates and pressured negative interest rates precisely because there is a growing recognition that the gain in economic growth is difficult to discern but the destruction of the financial system is easier to see. So, I am not too sure that this policy of negative interest rates as a monetary tool is really going to continue.

If it doesn’t continue, the only way it can go is higher. After the first rate increase in a decade, the Fed seems to have developed cold feet. I agree with the US Fed that you should raise rates when the economic conditions say that you need to raise rates. I think there is going to be a surprise. The next financial surprise very well may be that the economic conditions requiring rates to rise in the US may become apparent by the end of this year. I wouldn’t underestimate the latest job numbers from the US, wage growth, consumer spending in the US. There is generally a 9-12 month lag between a drop in gasoline prices and increase in consumer spending. We may be seeing that lag having played out and if in fact we are getting the economic growth implied by the payroll, wage pressure and consumer spending, you may see the Fed moving sooner than the market anticipates.

But the Fed has been moving goal posts from unemployment to China to Brexit.
Whether it’s the rising dollar or what has happened to certain sectors in the US, you could argue that inflation and inflation expectations have been such that the Fed was not compelled to raise rates. There is a possibility that with unemployment where it is, you may start to see wage pressure, see inflation expectations move, see more economic growth on the back of consumer spending and then the Fed will move. If the Fed starts to move, it will be interesting how that influences monetary policy elsewhere. The advantages of zero to negative interest rates may have played out. I don’t believe that the Fed will raise rates in a fashion that will cease economic growth. I think they will be moderate in how they raise rates. But if we have any level of real economic growth, interest rates at this level does not make any sense.

Bond yields are at unseen levels. Will this bubble bust when the Fed moves?
If the Fed begins to move, you could have quite a dramatic move in bond prices. Credit spreads are not in a bubble, they are reasonably normal. Corporate bonds based on the credit spreads are fine. A bubble is when an asset class is at a valuation, which is not sustainable. So long as central banks are buying assets the way they are in managing the short-term rates, its pricing is rational. So, it is not a bubble in that sense. The sovereign debt market is reflecting a world that believes that economic growth is stagnating. If there has to be a surprise today, it may be that the US economy is not stagnating. Barclays has been shrinking presence in some regions, including India.

Do economic prospects appear dim?
We think economic prospects are very favourable. The government is working very hard to change laws so that India restructures itself to provide economic growth. It’s got a judicial system which we think is very well respected and new bankruptcy laws are very intelligent. It’s got an educated population that is very comfortable in the world of technology and increasingly so. It’s got very well run corporations from Tata to Reliance. It’s not a developing country dependent on commodities almost uniquely. In fact, it’s one of the countries which benefits when commodities get cheaper, that is a very positive sign. It’s not just what’s taken out of the ground but what is being built above the ground, which is the strength of India. The Prime Minister’s engagement with world leaders has shown a maturity and sensitivity to geopolitics has served India really well. So, I am a buyer.