March 29, 2024

British Banks May Be Undercapitalized, Bank of England Governor Warns

The central bank said in a report that current capital ratios at major British banks — a measure of their ability to withstand financial shocks — were probably insufficient because possible future losses and costs of bad loans or other past business decisions might be bigger than expected.

The Bank of England also said that banks should be more transparent in communicating their credit buffers and look more prudently at risks to their financial soundness.

“We need to ensure that reported capital ratios do in fact provide an accurate picture of banks’ health,” Mervyn A. King, governor of the Bank of England, said during a press briefing as he presented the report. “At present there are good reasons to think that they do not.”

Capital ratios at the four biggest British banks — Barclays, Royal Bank of Scotland, Lloyds Banking Group and HSBC — could be overstated by £5 billion to £35 billion, or $8 billion to $56 billion, according to a hypothetical example in the report. That means that the banks would, under certain situations that the central bank did not disclose, need to raise an additional £5 billion to £35 billion.

The central bank declined to give a more concrete figure on how much it thought the banks should raise. Mr. King, whose term as governor ends next summer, has previously suggested that banks should cut bonuses and use the money to expand capital buffers. He has repeatedly warned during his tenure that banks’ capital cushions are too thin.

Mr. King said Thursday that banks would not have to turn to taxpayers for more capital. Initiatives by the Treasury and the Bank of England, including cheaper financing for banks if they commit to increased lending, have been helping banks to access funds.

The Bank of England called on the Financial Services Authority, Britain’s financial regulator, to talk to the banks and encourage a more realistic valuation of their assets, future costs and risks.

The F.S.A. should sit down with the banks and say, “Look, I think you should look more prudently” at the credit levels, Mr. King said.

He did not suggest that banks were dishonest in booking provisions or taking into account future possible losses. But he said that reporting standards did not require them to be more vigilant and therefore many banks were unwilling to be more prudent about possible future losses.

As part of its new regulatory powers, which take full effect next year, the Bank of England could be stricter with how banks report their capital levels. And it could require them to be more conservative in assessing future risks. But so far, there has been little consensus on exactly how much capital is needed or how banks would be allowed to raise it.

Barclays and Royal Bank of Scotland did not comment on the report.

The new regulatory regime in Britain, which includes the Bank of England’s financial policy committee, is to be in place when the bank’s next governor takes over in July. The government this week named Mark J. Carney, the head of the Canadian central bank, to take over from Mr. King.

Mr. King said Thursday that the additional capital was needed because even though the sentiment in financial markets had “improved a little,” global growth remained weak and “significant adjustments” on debt in the euro zone were still expected.

Lloyds, Barclays and R.B.S. have had to recently increase the amount they set aside to compensate customers who were inappropriately sold some payment insurance, raising concerns among investors that such provisions could rise further.

It is also not yet clear how much banks may have to pay in penalties as a result of the continuing investigations into the rigging of the London interbank offered rate, or Libor.

Higher capital levels should help banks to regain investor confidence and, as a result, make it easier and less expensive for them to raise money in the financial markets, Mr. King said.

Article source: http://www.nytimes.com/2012/11/30/business/global/british-banks-may-be-undercapitalized-bank-of-england-governor-warns.html?partner=rss&emc=rss

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