UK Banks Need to Raise $38 Billion: Bank of England

The Bank of England
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The Bank of England

U.K. banks will be need to raise an extra 25 billion pounds ($38 billion), the Bank of England's Financial Policy Committee (FPC) said on Wednesday, detailing the capital shortfall facing the country's financial institutions.

The committee's findings included prescriptions for a number of institutions to further increase capital buffers to reflect a proper valuation of their assets.

Over the next three years, high-risk loan portfolios, including exposure to the country's commercial real estate and vulnerable euro-area economies, could exceed existing provisions by around 30 billion pounds, it said in the press release.

Future conduct costs could exceed the current amount by 10 billion pounds and a "more prudent" approach to risk-weighting their assets would also cost 12 billion pounds, it said.

"Taken together, the effect of these three adjustments would be equivalent to around a 50 billion pound reduction in the regulatory capital of the major U.K. banks and building societies," the FPC said in the statement.

The FPC added that banks should achieve a capital ratio of at least 7 percent of their risk-weighted assets by end 2013.

"Some banks, even after the adjustments described above, have capital ratios in excess of 7 percent; for those that do not, the aggregate capital shortfall at end 2012 was around 25 billion [pounds]," it said.

It did not disclose the names of specific banks which had already achieved these ratios.

Shares of RBS and Lloyds, still both part-owned by the U.K. taxpayer, both traded higher by 0.17 percent and 2.833 percent respectively after the news. Barclays' stock rose 1.27 percent.

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Beforehand, expectations had been for the committee to force banks to raise anything from around 24 to 60 billion pounds in extra capital.

"That actually looks like a fairly sensible number", Bill Blain, senior fixed income broker at Mint Partners said after the announcement. Banks having too much money could be more of a problem than having too little, he said, as it meant that banks were not lending it to companies.

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Critics hit back at the potential ruling even before Wednesday's announcement.

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The whole apparatus of bank capital regulation which has done so much to make the banking system more opaque should be abandoned, according to a new report by the Institute for Economic Affairs.

"Swathes of complex capital regulation have made banking riskier," it said. "Attempts by the British government to require large banks to hold very high levels of capital are misguided."

Aside from this ruling, a flurry of recent banking reports have emerged since the financial crisis.

The Vickers Commission in the U.K., the European Banking Authority and the Liikanen Commission report have all detailed future plans whilst muddying the waters for investors. The Basel III banking regulation is due to be phased in over the next few years which will give banks new rules on capital requirements, leveraging and liquidity.

Paul Donovan, global economist at UBS told CNBC Wednesday that U.K. banks have been busying themselves with raising more capital but are still not up to the level shown by their U.S. counterparts.

"This [report] is not going to lead to negative bank lending but it's creating a slower pace of bank lending than would be considered normal," he said before the announcement.

By's Matt Clinch