Rough ride ahead for Barclays as it tries to shore up finances

Barclays also announced its adjusted pre-tax profits fell by 17% over the first six months of 2013 to £3.59 billion. Photo: Dave Thompson/PA Archive/Press Association Images

Biting the bullet, grasping the nettle, taking the bull by the horns; none of the sayings quite encapsulate what Barclays has decided to do as the bank reveals that it is having to raise £5.8 billion from investors over the next few weeks to make it safer from a collapse like that which befell Northern Rock.

It's a huge sum, more than analysts expected - yet still not enough immediately to fulfil demands from regulators at the Bank of England that it match three per cent of the total loans on its books with capital of its own provided by shareholders.The Bank's Prudential Regulation Authority (PRA) recently issued this requirement and Barclays revealed that it is about £12.8 billion short.

Today's announcement, offering shares at a discount to existing shareholders goes not-quite halfway to that goal so it will also have to raise money through bonds, retaining profits (not paying them to shareholders as dividends) and cutting lending.

The latter option reduces the amount of cash it has to raise as buffer but is precisely not what the Bank of England or the Chancellor want to see as they try to encourage lending, especially to small businesses.

The regulators have nevertheless welcomed the mix as the best options: the PRA says this in a statement:

We have considered all elements of the plan, including new capital issuance, planned dividends and management actions to be taken and, based on Barclays' projections, conclude that it is a credible plan to meet a leverage ratio of 3%, after adjustments, by June 2014 without cutting back on lending to the real economy.

Barclays has set aside £2 billion for customer mis-selling, including £1.35 billion for payment protection insurance. Credit: Joe Giddens/PA Wire/Press Association Images

It's a big upheaval and banks as a group have been complaining bitterly about the restrictions these new rules (called capital requirements) are having on their business.

The Business Secretary, Vince Cable, spoke in their support last week using an extraordinary term: 'banking Taliban' about the regulators.

But even these stricter rules mean that banks are allowed to borrow up to 97 per cent of the money they use to make loans with. If there were another big shake-up in the market which meant only 3 percent of their loans went bad then the banks' entire capital stake would be wiped out and we'd be back into crisis levels. It doesn't sound like a lot, does it?

The hope is that a change in culture in banking, that it becomes more 'boring,' for want of a better word, means that it evolves into a more stable sector.

Barclays' share price dipped to five per cent today. Credit: Frank Rumpenhorst/DPA/Press Association Images

The CEO of Barclays, Antony Jenkins, says the bank "will be stronger as a result of the actions we are taking today."

Shares in Barclays have dropped over five per cent as I write this, after falling heavily yesterday. It's a rough ride on that bull before reaching safety.