Banks say new capital targets are impossible

 
Tim Wallace
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THE BANK of England yesterday called on banks to raise more capital, demanding the industry slashes pay and issues more capital instruments.

But industry insiders say that is simply not possible as the market will not be able to cope with a huge new round of capital raising.

The Financial Policy Committee’s minutes were published yesterday, showing it has called on the Financial Services Authority to monitor the accuracy of reported capital levels.

“Where such action reveals that capital buffers need to be strengthened to absorb losses and sustain credit availability in the event of stress, the FSA should ensure firms either raise capital or take steps to restructure their business and balance sheets.”

It has not published the amount of capital required, though previous estimate suggest the biggest four banks could need up to £35bn extra.

But bankers believe it is impossible.

“The market will not support such a large increase in a short space of time,” said one senior banker involved in capital markets.

“The Bank will just start out with this high number as a goal before the realities of what is possible sink in. Regulators and banks will have to meet somewhere in the middle.”

A source at another bank agreed. “We just do not know what the appetite is for these instruments, and it will not be good for stability is we now see a whole lot of unsuccessful capital raising attempts,” he told City A.M. “It seems counterproductive that this has been put out in public – to say banks need to raise a large amount of capital will just increase the pressure.”

And another from a third major institution said raising capital by issuing cocos may sound sensible, as the instruments bail out banks in trouble – but warned they have not been tested in crises, and if they, say, turn illiquid when banks do get hit problems, it could worsen the crisis.