Outlook: Shock, horror. Barclays not wiped out by rising bad debts

Oil price spike; Unilever

According to Sir Peter Middleton, chairman of Barclays, the banking system is sinking under an ever growing mountain of regulation, from the seemingly endless stream of government reviews and new accounting rules, to the capital requirements of Basel II, the corporate governance obligations of Sarbanes-Oxley, and the price controls imposed by the Competition Commission. There will be plenty more of the same ilk arriving shortly from Europe, he predicts.

It's all very worrying, claims Sir Peter, inhibiting as it does sensible risk taking, and making it increasingly difficult to explain the business in simple terms to customers, employees and shareholders. I'm sure Sir Peter is right about all this, but the truth of the matter is that it doesn't seem to have interfered with Barclays' ability to function and make oodles of profit one jot. Rather the reverse in fact.

All five of Britain's big high street banks have thus far survived one of the most vicious business downturns in living memory with only very minor damage to bottom line profits. In past cycles, Barclays and others would by this stage be crying out in pain and one or two of them would undoubtedly have been loss making. It was not a loss that Barclays was reporting yesterday, but a £3.2bn profit before tax and a post tax return on capital of nearly 15 per cent. In the early 1990s Barclays had to write off more than 2.5 per cent of the value of its loan book. The bad debt write off last year was little more than a fifth of that. Matt Barrett, Barclay's chief executive, would put that down to good management, but better standards of regulation and oversight are a large part of the story too.

I exaggerate, of course, but the banking system in Britain today is obviously so much healthier and more robust than the way it was in the good old days of reckless, unregulated, lending mayhem that it is tempting to dismiss Sir Peter's comments as just a whingeing irrelevance.

One of the reasons why the British economy is performing relatively well at the moment is that the business downturn has not been accompanied by the usual banking crisis and credit crunch. The same cannot be said of Germany, where problems in the banking system are compounding an already serious economic malaise. OK, OK, so Sir Peter has got a point about much of the recent growth in regulation, some of which is meddlesome nonsense. It is also certainly true that many of the improvements made in risk control across the Anglo-Saxon world have been self administered by banks, rather than imposed from the outside.

None the less, it was a process begun by banking regulators, and hugely successful the new approach has been in limiting the sometimes catastrophic bad debt experience of past cycles. Greater regulation and improved self discipline are just different sides of the same coin. Things may be getting worse in some respects, and the regulatory burden is certainly beginning to reach unacceptably onerous levels, but the overwhelming verdict on greater public scrutiny of banking is that it has improved things enormously.

Fast back to the late 1980s when Barclays launched a near £1bn rights issue under the slogan of "Number One by Ninety One". Far from being number one by the early 1990s, Barclays was close to being bust after an unchecked commercial property and small business lending binge of previously unparalleled proportions. As a former Treasury mandarin, Sir Peter would know better than most that when savings and the economy are put at risk in this manner, there will inevitably be a furious regulatory backlash, and much good it has done Barclays, too, to judge by yesterday's year end results.

Oil price spike

Oil still has the power to shock. Over the past three months, oil prices have risen 45 per cent, with the benchmark Brent crude price closing yesterday at a new two-year high. That's not just because of Iraq, of course. The strike in Venezuela, a major supplier to the US, has been an equally potent factor, as has Europe's exceptionally cold weather. War against Iraq also finds the US with its lowest reserves of crude since 1975, when the stock pile was originally established in response to the Middle Eastern oil embargo.

There are already alarming parallels with what happened in the lead up to the last Gulf war in the early 1990s. As war approached, the price spiked sharply upwards. Then as now, the rising oil price found the world economy in an already fragile state and although the price quickly sunk back again as soon as it was realised that the war would lead to little or no disruption in supply, the oil price spike might have helped tip the US into recession. There were other, more powerful forces already at work in demolishing the UK economy, but the oil price cannot have helped.

It is still a matter of debate as to whether the Federal Reserve's policy response at the time of the Gulf War was the right one. Some say that the Fed was too slow to cut rates, and, by the time it did, the rising oil price was already wrecking havoc with inflation, necessitating later, deflationary interest rate rises. The Fed certainly cannot be accused of that this time. Sod the inflationary implications of a rising oil price, the Fed has been in patriotic cutting mode for well over a year now. Alan Greenspan, the Fed chairman, is widely expected to cut interest rates again as the invasion gets under way.

The big problem with a rising oil price is that it both adds to inflation and stunts growth at the same time. The world's big developed economies are far less dependent on oil than they were during the two great oil price shocks of the 1970s, nor is the scale of the increase this time around anything like as big. But oil still has the power to do damage when combined with the already fragile state of business confidence, and it is yet another reason for hoping and praying that if/when the war begins, it will be short and sharp.

Unilever

Niall Fitzgerald, chairman of Unilever, has still got another two years to go of his "Path to Growth" programme for the company, but already he's thinking about what comes afterwards. That's for the company, of course, not for him personally. Mr Fitzgerald is now into his seventh year at the helm of Unilever, and if he's beginning to tire after what is already a marathon reign by the standards of most FTSE 100 bosses, he certainly doesn't show it. As it happens, marathon running is one of his hobbies.

During that seven years, he's reshaped one of the sleeping giants of global business into an enterprise ­ yes, enterprise, no longer an institution ­ that's firing on all cylinders and more than delivering on the targets it's set for itself. For Mr Fitzgerald, the most important thing is that he completes the programme according to plan, and he claims not to be that bothered by the obvious question ­ is Niall the man that will see Unilever through the next phase of development too?

It must, however, occasionally cross his mind. Does Mr Fitzgerald really want to hang around long enough for some ghastly cock-up to bear down on his reputation, as inevitably it does even to the most accomplished of business leaders if they stay too long? Or does a top policy job, say with the European Commission, beckon?

Mr Fitzgerald is very much the public face of Unilever. Indeed, it is hard to name any other senior executive at Unilever at all. If there is an obvious successor, he's yet to emerge into the limelight. For the time being, Mr Fitzgerald continues to execute his duties with a drive, energy and vision that few others on the global business scene can match. And though most of us might regard Unilever as a bit of a BBC (Big, Boring Company), it plainly still motivates him to get out of bed each morning.

The challenges facing Unilever over the next 10 years are just as big as the ones Mr Fitzgerald has already slain, perhaps bigger with the huge growth market of China and the rest of the Far East yet to conquer. Still, there's a while left yet before Mr Fitzgerald and his shareholders have to make their choice.

jeremy.warner@independent.co.uk