Biggest UK lenders have a £25bn capital shortage

Sir Mervyn King has given banks a monetary capital target to cut incentives to reduce lending
Sir Mervyn King has given banks a monetary capital target to cut incentives to reduce lending

BRITAIN’S biggest banks have underestimated the risks they are running and short of capital to the tune of £25bn, the Bank of England warned yesterday.

RBS and Lloyds are expected to have to raise most of the £25bn, while Barclays and HSBC are believed to be broadly in the clear.

Governor Sir Mervyn King wants banks to issue capital and reorganise balance sheets to make up the shortfall, telling them not to cut lending.

But critics fear the measures will divert resources away from lending.

The financial policy committee (FPC) said banks have not fully taken account of expected losses, fines and PPI compensation payouts.

Those predicted losses mean the banks have under-reported their capital needs by around £50bn. Some of the shortfall comes from well capitalised banks, so overall the sector must raise £25bn this year.

On top of the £25bn, some banks will be ordered to raise capital levels further if they have particular exposures to areas deemed risky, whether by location like the Eurozone, activity like trading and markets units, or markets like commercial property.

“The shortfall of capital is not an immediate threat to the banking system and the problem is perfectly manageable,” said governor Sir Mervyn King. “Far from reducing lending, the recommendations will support lending and promote growth. A weak banking system does not expand lending.”

But analysts said the change is unlikely to work out as planned.

“It is virtually inconceivable there will be no clandestine deleveraging,” said Daiwa’s Michael Symonds. “The proclamation looks set to undermine recent efforts by the UK government to revitalise bank lending highlighting the conflicting messages coming from regulators and politicians.”

THE CAPITAL PROBLEM

  • Banks have a £25bn capital hole to fill.
  • Sir Mervyn King wants them to raise capital and tweak balance sheets to meet it, and has given a monetary capital target to cut incentives to reduce lending.
  • He also wants them to cut bonuses and dividends to plug part of the gap.
  • Lenders will now be subject to regular stress tests to stop shortfalls in future.
  • The target is 7% capital, but those with extra risks will have to go higher
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April 22, 2014, 2:25pm