That means different banks could hold different levels of capital against the same asset, because they have assessed it in different ways.
Fears of a discrepancy between real and reported levels is undermining investor confidence in the industry, the Financial Stability Report said, raising banks’ funding costs and hitting interest rates and lending levels.
As well as inconsistent or overoptimistic risk weightings, “unexpected future credit losses may be understated and costs arising from past failures of conduct may not be fully recognised,” warned governor Sir Mervyn King.
The report estimates the four biggest banks have an unrecognised shortfall of £5bn to £35bn.
The Bank called for the FSA to intervene, looking behind the headline figures published by banks and compelling those with a shortfall to raise more capital or restructure to cut the level of capital needed.
Sir Mervyn said he wants a report by March from the FSA on the action they have taken to assess capital levels. Future changes could include negotiating internationally to come up with industry-wide risk weighting standards, and may lead to more transparency in capital level measurement.
But banks hit back, telling City A.M. the Bank of England is simply playing politics, and wants to be seen as tough by telling banks to raise capital levels while actually giving little detail.
“The Bank’s comments don’t ring true – investors still have confidence in us, we think we have provisioned what we need to on PPI, the Bank does not give details on where it wants capital levels to be,” said a source at one of the big four banks. “We do want more definition around standardised risk weightings, and to be on the safe side we are already going further than that. Everything else is a bit wishy washy – it just seems a bit politicised.”
The report also called on banks to cut the number of zombie firms they work with, being more forward looking to see which firms will be unable to pay off their debts in future.
By writing down more loans, the Bank hopes to free up more cash for lending to more productive firms.