UK banks face £25 billion capital shortfall

The Bank of England’s Financial Policy Committee (FPC) has warned that major UK banks and building societies currently have a shortfall in capital of around £25 billion.

The financial stability regulator said banks should aim to achieve a common equity Tier I capital ratio of at least 7% of risk-weighted assets by the end of 2013.

“You have the Basel III/Capital Requirements Directive complex in the EU, and what the FCP is doing today is probably only a little carbuncle on its bottom,” commented an industry source speaking at a conference in the City of London today. The conference was held under the Chatham House rule, which prevents participants being quoted by name.

“None of the banks have actually been told what their deficit is,” warned another participant. “They know that if they wait until the end of this year that £25 billion turns into about half the number, but they don’t know whether they have to solve it today or in Q2, Q3, or Q4.”

It is believed some banks’ plans to bolster capital should cover half of the shortfall in aggregate, but the FCP has not provided a breakdown of how much each bank needs to raise. It stated some banks already have capital ratios in excess of 7%, but for those that do not, the aggregate capital shortfall at end-2012 was around £25 billion.

“What I would really like is that when we identify a gap, we deal with it very quickly,” said the participant. “I understand we’re moving from a lot of uncertainty, but the ideal would be annual stress tests where decisions on dividends, bonuses, and capital plans are directly connected to the stress tests.”

The FCP said today the Bank of England and the Prudential Regulation Authority (PRA) should develop proposals for regular stress testing of the UK banking system from 2014 to assess the system’s capital adequacy.


This article was first published on Risk


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