“We live in a world of big numbers. Billions are boring. You, dear reader, belong to the trillion pound generation. Take for example Barclays. Its balance sheet totals £1.5trillion. That’s about the size of Britain’s annual economic output. It is a big number.
Now the thing about big numbers is that even a small percentage of a really big number is – a big number. Thus the Government agonizes over each 0.5 per cent of economic growth.
Rightly so – since each 0.5 per cent on a £1.5trillion economy makes a £75billion difference to jobs, incomes and well being – annually.
The same arithmetic applies to the banking behemoths of our day. A small percentage loss on trillions of pounds of banking assets may quickly translate into one less bank, or one more call to the taxpayer.
So just how much can a bank such as Barclays afford to lose before it fails, or until it is bailed out?
Well, 2.5 per cent of Barclays assets (read risks) are funded by loss absorbing shareholder equity.
Sometimes called ‘capital’ this is the bit that takes the hit when things go wrong.
Barclays then funds the other 97.5 per cent by borrowing. This is the bit that takes the hit thereafter. Not surprisingly, the faster bank capital erodes, the faster a bank’s lenders withdraw their funding. No funding, no lending.”
Read full Daily Mail Op Ed here