Banks may face tougher capital reports in future

Tim Wallace
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BIG BANKS could soon have to publish their capital levels in a standardised way to make comparisons between lenders easier, City A.M. understands.

The Bank of England’s prudential regulation authority (PRA) found banks were over-reporting their capital levels to the tune of tens of billions of pounds, and is involved in an international drive to improve transparency in capital reporting.

The largest lenders can use their own in-house models to determine how much capital they need to put aside, while smaller banks use a standardised model from the regulators.

That leads to large discrepancies in capital buffers – for instance a small bank has to apply a risk weighting of 35 per cent to its prime mortgage loans, while the largest lenders can set aside as little as five per cent.

The Bank of England is working with the international Basel Committee to consider how to level the playing field and increase transparency around capital levels.

One possible outcome could be to make banks publish capital levels twice – once on their own models, and once on a stricter standardised model.

Despite the PRA finding problems with their capital levels the biggest eight lenders reviewed by the PRA last week still have no plans of their own to change the way they calculate or report capital levels, as their systems have been agreed with the regulator.

Top Bank of England executive Andy Haldane told MPs this month he wants to make the system more transparent and level the playing field for smaller banks, which could see the gap between big and small banks’ capital requirements reduced.

He sits on the Basel Committee, representing the Bank internationally.