Barclays Plc’s top executive said it’s “more than likely” there will be another financial crisis, but problems inside the banks themselves are unlikely to be the trigger this time.

Instead, Jes Staley said he sees potential shocks from a seize-up in credit markets — a key sector for Barclays — given where risk in the system has gone since banks shrank their balance sheets. A hard Brexit is another risk.

“This time, there’s a chance the banks will be the buffer, as opposed to the cause” of the crisis, Staley, who has been the British bank’s chief executive officer since 2015, said in a Bloomberg Television interview with Francine Lacqua from the World Economic Forum in Davos, Switzerland.

As well, “there is an extremely high amount of debt in sovereign balance sheets” on the back of historically low-interest rates, he said.

High-Yield Debts

Staley cited the flow of credit into collateralized loan obligations, or CLOs, entities that pool high-yield debts and then slice them into securities of varying risk and return. The market for those assets was strong in 2018, with new U.S. issuance hitting a record of $130.4 billion.

Barclays created about $8.7 billion of new U.S. CLOs in 2018, placing the bank eighth among the world’s biggest arrangers of the products, according to data compiled by Bloomberg.

Staley also pointed to the lack of high-yield debt issuance in December, a warning sign for companies that need to roll over their debt. “If that had extended into the first quarter, that itself would have created a potential credit shock,” he said.

Mergers Don’t Work

This year’s Davos is abuzz with discussion about European bank mergers, but Staley poured cold water on the idea as a panacea for the industry. While banks’ financial strength is much improved from the last crisis, share prices swooned last year amid a mediocre outlook for earnings, and German policymakers are said to be discussing the merits of a tie-up between Deutsche Bank AG and Commerzbank AG.

European Bank Mergers Are Alive in Davos Executives’ Dream Deals

Investment bank mergers “do not work as a way to get scale,” said Staley, a former senior executive at JPMorgan Chase & Co. He cited JPMorgan’s crisis-era deal to acquire Bear Stearns. “I was there.” Dealmaking takes banks’ focus away from focusing on technological innovation, he said.

Staley said the lender already has the scale it needs to compete with the big Wall Street firms. “I don’t think Barclays is second-best to a U.S. bank,” he said.

The CEO, whose strategy has come under fire from activist investor Edward Bramson over the past year, also said Barclays is controlling risk and feels “very comfortable” about its positioning. A letter last month from Bramson, who holds more than five percent of Barclays, referred to Barclays’s corporate and investment bank as a “black box with too much leverage.”

Staley also said Barclays is ready to handle risks coming from Brexit. Like other British bankers, he said the lack of certainty just weeks away from the scheduled March 29 exit date from the European Union has been hitting the U.K. economy.

“There is no question there has been an economic cost paid by U.K. consumers as this uncertainty has been going for so long,” he said. “There are going to be shocks if indeed there is hard Brexit, and I don’t think that would be constructive, either for the EU or the U.K.”

Published Jan 24, 2019, 9:17:24 AM, by Stefania Spezzati and Harry Wilson (Bloomberg).