Jeremy Warner: FSA finds that Barclays is telling the truth

Outlook: Right from the start of the banking crisis, Barclays has attempted to argue that it should be viewed differently from other banks, that it had managed its risks more effectively than rivals during the long boom, and that there was therefore no need for the UK Government support that the others had had to avail themselves of.

It's fair to say that the stock market hasn't entirely believed these protests. The suspicion was that hidden within the black box that is Barclays Capital there lay a whole host of exposures that the bank wasn't admitting to. This suspicion was only enhanced by the fact that Barclays seemed to be marking down its asset-backed securities and leveraged loans by less than rivals.

Well, now the Financial Services Authority has "stress-tested" the books, using the same set of extreme assumptions about the length and depths of the recession as those applied to Royal Bank of Scotland and Lloyds Banking Group in recent negotiations over use of the asset protection scheme (APS), and apparently found that Barclays is indeed telling the truth. Even after exposure to these tests, Barclays says it continues to meet the capital requirements stipulated by the Financial Services Authority earlier this year.

The stock market liked what it heard, with the shares up an extraordinary 24 per cent yesterday. Since they hit bottom in late January, the shares have virtually tripled, taking them back to where they started the year. Has Barclays finally won back the stock-market credibility that has so long eluded it? Yes and no.

Unless you wanted to accuse the board and the auditors of lying, it must always have been the case that the books were roughly what Barclays said they were. The question was rather about how robust these assets would prove in an extreme downturn, and whether capital was sufficient to withstand such impairment. On asset-backed securities (ABS), the FSA seems to have agreed with Barclays that because its portfolios is of earlier vintage than the likes of RBS, it is also inherently safer and therefore likely to be worth more.

Perhaps it was the chastening experience of the last recession, when Barclays nearly went bust under the weight of crippling commercial property losses, but the bank seems to have been smarter this time around than rivals in limiting its exposure to commercial property and high-risk, deal-driven, business adventuring.

Unfortunately, yesterday's apparent clean bill of health from the FSA doesn't necessarily mean Barclays has avoided the need for further capital. As things stand, Barclays is one of the most thinly capitalised banks in Europe. OK, so if the FSA analysis is right, bad debt recognition won't be as punishing as for others, so in theory Barclays needs less of a capital cushion.

Yet we are also in a world where investors and depositors demand big capital buffers, whether they are needed or not. The assumption that core tier-one equity capital can be worn away to 4 per cent before anything more needs to be raised may be good enough for the FSA, but possibly not for markets in their current risk-averse state. The planned sale of iShares will help quite a bit, though it will also damage overall profitability.

On the other side of the ledger is whether Barclays participates in the Government's asset protection scheme. Participation will carry a heavy cost, which Barclays has said it will pay in cash, should it decide to go that route. Capital is further impaired by participation, but investors could then have more confidence in Barclays' relatively low capital ratios.

In any case, it is beginning to look as if Barclays has succeeded in squirming its way out of UK Government involvement. Determination to escape the heavy hand of Gordon Brown has come at quite a price. By riding roughshod over pre-emption rights and instead raising capital with Middle Eastern investors, Barclays has incurred the wrath of many shareholders.

Not many top bankers have managed to ride out the storm over the past two years. Marcus Agius and John Varley, chairman and chief executive of Barclays respectively, are among them. They've promised by way of penance to put themselves up for re-election at the next AGM. Whether they can survive that test too depends vitally on how they handle the still all-consuming capital and related APS issues. Yesterday's news certainly improves their chances.