Barclays sparked surprise yesterday as it disclosed that it had expanded its balance sheet by a mammoth £900 billion over the past year, making it significantly bigger than the entire British economy.

Total Barclays assets and liabilities each mushroomed to more than £2 trillion, both now larger than UK gross domestic product at £1.4 trillion, mostly because of hundreds of billions of dollars of derivative positions acquired alongside the September acquisition of the North American assets of the bankrupt Lehman Brothers.

While the bank gave assurances that it was strong and well-capitalised, the size of its balance sheet would pose problems for British taxpayers and affect the perceived creditworthiness of the UK Government in the unlikely event that the bank were to fail.

Most analysts welcomed the results, including a fall in pre-tax profits of a relatively modest 14 per cent to £6.1 billion. However, a minority focused on the leap in derivatives — in essence, complex bets and insurance policies on the direction of financial markets and the creditworthiness of organisations.

Sandy Chen, of Panmure Gordon, said that he was concerned by the derivatives-led expansion of the bank's balance sheet. Its £29 billion of shareholders' equity looked “a relatively slim bulwark” against any deterioration in asset quality.

John Varley, Barclays' chief executive, said that he was “absolutely confident” that additional capital would not be needed, and defended the decision to pay out bonuses to thousands of staff, albeit at 50 per cent of the level of 2007 bonuses. In theory it would need only a 1 per cent deterioration in the bank's £2.05 trillion of assets to wipe out its capital cushion of £17 billion and require it to seek fresh capital.

Barclays Capital, the investment banking arm, is paying out about £600million in bonuses despite making underlying losses. BarCap reported a headline profit of £1 billion, down 44 per cent. But this was boosted by profits of £1.7 billion booked as a result of the fall in the value of its own bonds - an accounting quirk. The figure would also have been £2.3 billion lower but for a notional profit booked on the Lehman acquisition.

Barclays declined to quantify the size of bonuses paid in other parts of the bank, which employs 156,000 worldwide. Its annual wages bill fell from £8.4 billion to £7.8 billion, or an average of £50,000 per person. Main board directors have waived bonuses for 2008.

The bank played down the blow-out in its derivatives exposure, arguing that many of the bets cancelled each other out and that its net position was much smaller. The collapse in sterling had also exaggerated its exposure, as most of its derivatives are denominated in dollars and euros.

Mr Varley apologised for the near-collapse of the banking system. “Do we feel responsible? Of course we do. ” But he added that Barclays had fared much better than most of its rivals.

He said that he understood the public anger about bank bonuses, adding: “We feel the heat undoubtedly.”

The shares were marked 11 per cent higher to 116.2p as most analysts were reassured by a detailed rundown of the bank's structured credit exposures by its head of risk, Robert Le Blanc.

The company pension fund deteriorated from a surplus of £393 million to a deficit of £1.3 billion.

Barclays promised over time to reduce its balance sheet, now larger than Royal Bank of Scotland's, and said that it planned to resume paying dividends in the second half of 2009. By some measures its leverage has already come down significantly.

Peter Montagnon, director of investment affairs at the Association of British Insurers, urged banks to exercise restraint over bonuses. But he added that contractual obligations must be met and that people in successful sub-divisions deserved bonuses if their efforts helped to offset losses elsewhere.

— The Financial Services Authority (FSA) is poised to push through a new model for bonuses paid by banks that should change the way they reward staff, Lord Turner of Ecchinswell, the FSA chairman, said yesterday (Miles Costello writes).

Lord Turner said that the FSA would clamp down on banks that encourage traders to take short-term risks to win bonuses. He said that he understood the Government’s wish to tighten bonus payouts in struggling banks, particularly if the taxpayer has a stake. However, the FSA was trying to change the bonus culture in the long term and new rules expected to be issued by the FSA next month would apply to all banks, not just those with state aid.

The FSA, in its Financial Risk Outlook, said that the recession may be deeper and longer than predicted.

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