Barclays is ending trading in $700 billion of U.S. mortgage bonds that were issued before the financial crisis.
The firm no longer will regularly buy and sell the residential securities, which lack government backing, according to Adam Yarnold, the bank's head of securitized-product trading in the U.S. No traders will lose their jobs because its securities arm is allocating resources to other businesses, he said.
"This is a refinement to our strategy meant to improve our return on equity," Yarnold said in a telephone interview.
The move is the latest step by global banks to adjust to new regulations introduced after the financial crisis.
Barclays, Britain's second-largest bank, is scaling back from a market where most of the debt was cut to speculative grade levels during the housing slump. U.K. regulators now require banks including Barclays to hold even more capital against such junk-rated securities relative to other bonds.
For U.S. banks, ratings on mortgage bonds have become less crucial. Under post-crisis rules, U.S. lenders can use an alternative approach to calculating capital requirements that ignores the grades and in many cases reduces the amount needed for junk-rated mortgage bonds that are trading at discounts.
The change at Barclays continues a remaking of its investment bank that was announced more than a year ago. Barclays Chief Executive Officer Antony Jenkins pledged last year to eliminate 7,000 jobs, a quarter of employees at the unit, and shrink its fixed-income business amid demand from regulators for larger capital buffers and dwindling volatility in markets. John McFarlane, who joined as chairman in April, has vowed to reallocate capital and prioritize investment in the most profitable parts of the bank.
Barclays is hardly alone in its thinking. Royal Bank of Scotland Group's investment bank said in November that it would completely exit the U.S. mortgage market. The bank is planning to focus on its U.K. consumer and corporate business instead.
While the amount of so-called nonagency bonds has plunged since the crisis, more than $700 billion of precrisis debt remains outstanding, according to JPMorgan Chase & Co. data. The biggest dealers traded about $1.6 billion daily in the week ended June 3, compared to about $8.5 billion of high-yield corporate bonds, Federal Reserve data show.
Barclays will continue "making markets" in other types of nonagency mortgage bonds, such as risk-transfer notes sold by Fannie Mae and Freddie Mac and newly issued securities, as well as asset-backed securities and commercial-mortgage bonds, Yarnold said. The firm is taking a different approach on these securities because the debt is higher rated or the trading is important to Barclays' banking and underwriting businesses, he said.
The bank also may increase its trading of residential mortgage loans to meet investors' increasing focus on that business, Yarnold said.
