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UK banks ordered to plug £27.1bn capital shortfall UK banks ordered to plug £27.1bn capital shortfall
(about 11 hours later)
Barclays, Co-operative Bank, Nationwide and the two bailed out banks Royal Bank of Scotland and Lloyds Banking Group have been ordered to plug a £27.1bn capital shortfall identified by the new banking regulator. Barclays, Co-operative Bank, Nationwide and the two bailed-out banks Royal Bank of Scotland and Lloyds Banking Group have been ordered to plug a £27bn capital shortfall identified by the new banking regulator – sparking concerns about the impact the financial repairs would have on their ability to lend.
The Prudential Regulation Authority, part of the Bank of England, has also instructed Barclays and Nationwide to reduce the risks they take by borrowing too much and told them to produce plans to reduce their so-called "leverage ratio". The Prudential Regulation Authority, part of the Bank of England, also surprised the City by instructing Barclays and Nationwide to reduce the risks they take after focusing on a new measure of the risks being taken, called the leverage ratio.
All the firms said they had plans in place to fill the gap and that some £13.7bn of capital had already been found by the end of last year. Nationwide's £400m shortfall is already filled. The banks are not expected to tap shareholders for extra cash. Both banks have, according to the PRA, a leverage ratio which is below an internationally agreed standard of 3% - which allows banks to have assets worth 33 times their capital - which must be hit by 2019. The two have been given until the end of the month to come up with a plan to reduce their leverage although the PRA did not say when the target must be hit.
But even as chancellor George Osborne fired the starting gun on a sell-off the taxpayers' 39% stake in Lloyds, the PRA said the bailed out bank needed to find £8.6bn of additional capital to meet regulatory requirements. This focus on the leverage ratio was unexpected and could result in both of the firms – which have been actively lending to businesses and households – needing to find extra capital in addition to the shortfalls already identified. Analysts at Credit Suisse estimated that Barclays might need an extra £2.4bn or may have to cut back its assets by £81bn. However, there were also suggestions that the requirement could be even larger – as much as £7bn – if action was needed swiftly. Barclays has a plan to hit the ratio by 2015.
The biggest hole was at RBS, the 81% government-owned bank which Osborne has now said he could split up into a good and bank bad despite insisting only four months ago that he thought such a plan would be too difficult to execute. A £13.6bn shortfall was identified at RBS, £3bn at Barclays and £1.5bn at Co-op, which said on Monday it would list its shares on the stock market for the first time as it attempts to fill the gap. Of the £27.1bn capital shortfall identified by the PRA, some £13.7bn of capital had already been found by the end of last year.
But even as chancellor George Osborne fired the starting gun on a sell-off the taxpayers' 39% stake in Lloyds, the PRA said the bailed out bank had needed £8.6bn of additional capital and still had some £7bn to find. It will do so by selling off assets and reducing risks.
The biggest hole was at RBS, the 81% government-owned bank which Osborne said on Wednesday said he could yet split intotwo – good and bad – banks. But the £13.6bn shortfall identified at RBS has now fallen to £3.2bn, a £3bn shortfall at Barclays has been reduced to £1.7bn and Co-op said it will fill its £1.5bn hole by listing shares on the stock market.
Nationwide building society had a £400m shortfall which has filled but the mutual now has to tackle the implications of the leverage ratio measure. Nationwide, which has a leverage ratio of 2.1%, described it as "a less sophisticated measure which ignores the quality of assets or the business model".
It is the first time the City regulator has published such detailed information about the shortfalls but the move was criticised for potentially restricting lending and hindering future economic growth after the chancellor said in his Mansion House speech that the economy had "left intensive care".
Kevin Burrowes, UK financial services leader at PricewaterhouseCoopers, said: "While more transparency is welcome, it is debatable whether this disclosure is supportive of pushing economic growth or facilitates more bank lending."
In total eight financial firms were assessed – HSBC, the UK arm of Santander and Standard Chartered were given the all clear – to ensure they had taken large enough provisions for: compensating customers for mis-selling payment protection and interest rate swaps; further losses on loans after offering forbearance to customers by tweaking borrowing terms; and the way they value risks on their balance sheets.In total eight financial firms were assessed – HSBC, the UK arm of Santander and Standard Chartered were given the all clear – to ensure they had taken large enough provisions for: compensating customers for mis-selling payment protection and interest rate swaps; further losses on loans after offering forbearance to customers by tweaking borrowing terms; and the way they value risks on their balance sheets.
It is the first time the City regulator has published such detailed information about the capital shortfalls of banks in what is now expected to a regular healthcheck of the major banks.
But the move was criticised for potentially restricting lending and hindering future economic growth after the chancellor said in his Mansion House speech that the economy had "left intensive care".
Kevin Burrowes, UK financial services leader at PricewaterhouseCoopers, said: "While more transparency is welcome, it is debatable whether this disclosure is supportive of pushing economic growth or facilitates more bank lending." Burrowes said banks were facing "unprecedented regulatory upheaval" through the new international standards known as Basel III after the Swiss city where global central bankers meet.
"Despite the fact that many banks have already made significant investment and progress to ensure their compliance, there remains a growing sense of concern among both regulators and analysts over banks' overall capital levels," Burrowes said.
At the Mansion House on Wednesday night, Sir Mervyn King, outgoing governor of the Bank of England, insisted that the announcement by the PRA would "make our banking system more resilient and better able to support recovery" and rebutted claims that forcing banks to hold more capital was impeding their ability to lend.
The PRA said firms had been asked to produce plans to "address shortfalls that do not reduce lending to the real economy".The PRA said firms had been asked to produce plans to "address shortfalls that do not reduce lending to the real economy".
The authorities originally said in March that the shortfall in the banking industry was £25bn and that banks had taken steps to raise around £12.5bn of capital during 2013 – although that figure has since risen to £13.7bn.
Barclays still has £1.7bn to find, Lloyds some £1bn and RBS £3.2bn.
Barclays is understood to have been told only last week of the requirement to find a plan to cut back the leverage ratio to reach the requirement of 3% – allowing it to have assets worth 33 times its capital – due to come into force internationally by 2019. Barclays currently has a ratio of 2.5% – which means it has assets worth 40 times its capital – while Nationwide has a 2% ratio and has been told to produce a plan by the end of the month to reduce this ratio.
The plans of both banks will be considered by the PRA in July when the regulator intends to announce whether they are sufficient. Barclays' new boss, Antony Jenkins, has already said the bank has a plan in place to hit a leverage ratio of 3% by 2015.