UK banks need to fill £27bn capital hole
British regulators have ordered its biggest banks to bolster their balance sheets by a total of £27.1 billion ($42.1 billion) to prevent a repeat of the 2008 banking crisis.
The Prudential Regulation Authority (PRA) says Barclays, Lloyds Banking Group and Royal Bank of Scotland (RBS) account for much of the shortfall. The state -backed RBS alone must find £13.6 billion, with Lloyds lacking £8.6 billion in capital. Barclays must boost its capital by £3 billion.
Given the pressure to increase lending to businesses and families to kick start the economy, the PRA requirement is putting additional pressure on British banks.
The PRA report comes months after the Bank of England's Financial Policy Committee had asked to make sure the UK banks comply with the new Basel III guidelines on capital adequacy. The guideline agreed by international central banks, known as Basel III Core Tier 1 capital ratio, requires lenders to hold capital resources of at least 7% of their "risk-weighted assets".
The PRA determined that as of the end of 2012, Barclays, Co-op,
Lloyds, Nationwide and RBS "fell short of this standard."
Despite some of the troubled UK banks already taking action to plug the capital hole to the tune of £13.7billion, four of five of them still don’t meet a 7% requirement, according to the PRA. Now the authority needs to look at the banks’ detailed game plans to provide for £13.4 billion that is still missing. All the planned remedies like restructuring or sell–offs should be presented by the end of 2013, the PRA says.
In an effort to shake off concerns, Lloyds said it aimed to boost its capital adequacy ratio to above 9 percent by the end of June and increase it further to 10% by the end of the year. RBS also said it “continues to target” a 9% guideline by the end of this year, with Barclays reaffirming it can collect the needed £3 billion through disposals.
RBS the key concern
RBS one of the UK’s key lenders, was rescued in 2008 with a £45 billion ($71 billion) injection of state capital that has proved crippling to the British economy, according to the UK banking commission. Now the country's political leaders are anxious to return the bank, which is more than 80 percent owned by the taxpayer, to the private sector. But the timing, and therefore whether taxpayers will get their money back, remains up in the air.
Among the rescue options being mulled is the splitting off of the bank's bad assets into a separate legal entity, known as the good bank/bad bank split. RBS continues to be weighed down by uncertainty over the bad assets it still holds, and by having the government as its main shareholder, according to the UK banking commission. The governor of the Bank of England, Mervyn King, is among those who have argued that the losses for the taxpayer might be lessened if they were split, with the bad bank left with the state and unwound over time.
Treasury chief George Osborne said that selling a shares in RBS is “some way off,” but announced the government will “urgently investigate” the case for breaking up RBS and creating a “bad bank” of risky assets.
Osborne also confirmed that the government is “actively considering” options for selling shares in Lloyds, but did not set out a timeline for disposing of the government's 40 percent stake in the bank.
