Regulator’s exercise in transparency is as clear as mud

Elizabeth Fournier
YESTERDAY’S capital shortfall figures from the Bank of England’s prudential regulatory authority (PRA) were touted as a transparency exercise – the watchdog’s first chance to show off its skills since taking over from the FSA as the banking regulator in April.

The whole idea was to get big, systemically important banks to properly report potential holes in their balance sheets – a crucial piece of data that, when compared to new Basel guidelines, has left some of the UK’s biggest lenders facing serious questions over their ability to absorb losses.

Or has it? The headline figure to come out of the PRA’s study yesterday was £27.1bn – the watchdog’s calculation of the aggregate capital shortfall of just five British banks (Barclays, Co-operative Bank, Lloyds, Nationwide and RBS).

Scary, right? But also slightly misleading. Of that £27.1bn, banks had plans to cover almost half (£13.7bn) already in place, and yesterday Lloyds – facing a £7bn hole – was given a timely boost by a £1.6bn dividend payout from Scottish Widows.

But the real problem here is the huge gap between the regulators’ numbers and the ones provided by the banks themselves. While small lenders like Metro Bank must use the same method of calculation to report capital adequacy ratios, larger institutions are left to their own devices.

For example, the PRA automatically applies a 15 per cent risk weighting to all mortgage loans, while banks’ weightings can sometimes be as low as five per cent.

Across entire balance sheets, these discrepancies really add up – when the PRA’s risk weighting is applied to RBS its ratio is just 4.8 per cent – well below the Basel recommendation of seven per cent and leaving it with a £13.7bn hole to fill. But RBS,using its own methods, claims that ratio is more like 6.5 per cent – a much healthier number.

Of course, it would be strange if the regulator didn’t err on the side of caution.

But the lack of consistency – which the PRA currently has no plans to address ­– completely undermines the idea that the regulator is bringing transparency, instead adding another layer of confusion to an area that is already complicated enough.