How the ICB report could have caused 1,300 job losses at BarCap, but probably won't

This week's Independent Commission on Banking report wasn't as bad as it might have been. However, it was still bad - to the extent that the operational separation of retail and investment banking businesses will lead to higher funding costs for investment banks.

Dirk Hoffman Becking at Bernstein Research has done some digging into the implications of all this for Barclays Capital.

Dirk notes that Barcap enjoys a funding advantage of 16-42 basis points compared to standalone investment banks like Goldman Sachs and Morgan Stanley. He deduces that this is because investors have been willing to lend at lower rates because of Barclays' substantial retail deposit funding base

When that retail deposit base is ring fenced, BarCap's cost of capital couldrise to the same level as Goldman's and Morgan Stanley.

Hoffman Becking says this would make a huge difference to the profitability of BarCap. BarCap currently carries a 1,094bn balance sheet, of which about 700bn is funded. Therefore, every 10bp increase in funding cost means 700m in lower revenues.

Last year, BarCap paid an average of 236k per head. On this basis, a 700m reduction in revenues implies 1,272 fewer jobs. Alternatively, to maintain last year's compensation ratio of 43%, it implies a 1.3bn cut in pay.

Fortuitously, this probably won't happen.

Hoffman Becking also points out that BarCap's CDS spread is "materially higher" relative to other European banks given its capital levels and country risk. He attributes this partly to regulation risk.

Therefore, now that the ICB has proven relatively toothless, he suggests BarCap's funding cost could actually fall. With luck, BarCap bankers will be spared.