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RBS and Lloyds must raise extra £9bn

Ref: 157

Date: Thu 28/Mar/2013, 11:00

The Financial Policy Committee announced yesterday that UK banks were overstating their capital by £52bn, after it scrutinised their balance sheets with tougher measures of risk and factored in looming fines and expected losses.

The estimate was reduced to £25bn, less than some had feared, after factoring in banks’ existing capital buffers. The gap, however, must be bridged by the end of 2013, faster than expected.

Regulators believe that about half of the £25bn sector-wide shortfall is covered by banks’ existing plans to retain profits, shrink balance sheets and cut bonuses.

Most of the black hole is concentrated in Royal Bank of Scotland, which is 82 per cent owned by taxpayers, and Lloyds Banking Group, 39 per cent state-owned. RBS accounts for about £6bn of the remainder of the shortfall – between £12bn and £13bn in total – with Lloyds falling about £3bn short.

Barclays’ gross shortfall was the third biggest at less than £2bn, the people said.

Sir Mervyn King, Bank of England governor and FPC chairman, said the shortfall did not require further injections of public money into RBS or Lloyds. The government made clear in November it was not prepared to contribute additional taxpayer funds.

The governor also played down any disruption the capital deficit would cause: “The shortfall of capital, which the FPC has identified today, is not an immediate threat to the banking system and the problem is perfectly manageable.”

Some bankers expressed anger at the announcement. “This is the view of Mervyn and his capital jihadists,” said one senior bank executive. “It is not necessarily the view of regulators on the ground.”

The figure is at the bottom end of the £20bn-£50bn range the FPC identified last year.

Investors appeared reassured, although they are likely to remain jittery until there is clarity about individual banks’ capital positions. The process will involve further work by the Prudential Regulation Authority, the UK’s chief banking regulator, and is expected to take several more weeks.

The FPC concluded that banks had understated their capital needs for potential fines by £10bn and their risk from asset writedowns by £30bn. Bank supervisors also found that the banks were understating their risk-weighted assets by £170bn, meaning they need additional capital of £12bn.

The FPC, which is charged with spotting and defusing threats to the financial system, said supervisors should also consider even higher capital requirements for banks with concentrated exposures to risky areas or large trading books.

Business groups warned that forcing banks to raise more capital could further stymie economic growth. “While the FPC wants banks to meet additional capital levels in a way that will not restrict lending, it is difficult to see how this can be achieved in practice,” said Matthew Fell, CBI director for competitive markets.

But Sir Mervyn disagreed: “Far from reducing lending, today’s recommendations will support lending and promote growth.”


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