U.K. banks told to raise an extra £25b

Bank of England orders more money set aside to cover potential losses from commercial real estate and the euro area

PUBLISHED : Thursday, 28 March, 2013, 12:00am
UPDATED : Thursday, 28 March, 2013, 5:52am

British lenders were told by the Bank of England to raise £25 billion (HK$295 billion) of additional capital.

Banks need to set aside more money to cover bigger potential losses on commercial real estate and from the euro area, possible fines for mis-selling and stricter risk models, the Bank of England said following a report by the Financial Services Authority.

The BOE didn't identify or quantify the number of lenders that needed to bolster capital and it said plans already announced by banks should cover about half the shortage.

"It's a bit of a damp squib," said Simon Maughan, an analyst at Olivetree Securities in London. "The banks are going to have until the end of 2013, at least, to do it and there was no change to the message that they won't need to raise fresh capital or restrict dividend payments."

The BOE is pushing banks to increase resilience so they can boost lending and fund an economic recovery. The bank's focus on loan losses could still hit Royal Bank of Scotland and Lloyds Banking the most because of their commercial real-estate holdings, while Barclays, with its investment banking unit, would be most affected by the changes to risk weights, Maughan said.

The BOE said that expected loan losses could exceed provisions by £30 billion, while future fines and conduct-related penalties could be £10 billion more than banks expect.

It said lenders underestimated assets weighted for risk by £170 billion, leading to a £12 billion capital shortfall in that category.

The full impact of the three areas could deplete lenders' capital by £52 billion, less than the £60 billion estimate that emerged from the BOE's November Financial Stability Report.

Some banks already have enough resources to cover them, paring the shortfall to £25 billion, the BOE said yesterday.

"The actions that banks need to take depend on whether, and if so how far, their adjusted capital falls short of the level the FPC judges banks need to ensure sufficient capacity to absorb losses and sustain lending in the current juncture," the BOE said.

HSBC Holdings and Standard Chartered, the two British banks that get most of their profit from Asia, have the strongest core Tier 1 capital ratios under Basel III at 9.8 per cent and 10.7 per cent, respectively.

Barclays has a ratio of 8.2 percent, Lloyds 8.1 percent and RBS 7.7 percent.

Meanwhile, Britain suffered a long-expected political defeat when it failed to stop European Union countries waving through a cap on bankers' bonuses, an EU law that will hit London hardest.

Corporate largesse is under attack across Europe with Switzerland earlier this month voting to impose some of the world's strictest controls on executive remuneration amid public anger at Wall Street-style excess in company boardrooms.

But capping bonuses at the level of base salary represents a setback for Britain - home to the EU's largest financial centre.