(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By George Hay
LONDON, May 22 (Reuters Breakingviews) - Britain's new bank
capital tsar is all bark and no bite. Back in November, the Bank
of England’s Financial Policy Committee warned that UK lenders
could be looking at a 50 billion pound capital hole. On May 22
it emerged that Lloyds Banking Group (LLOY.L) and Royal Bank of
Scotland (RBS.L) won’t actually need to raise any new capital at
all. It’s not a great start for the new regulatory framework.
The FPC, a panel of central bankers and economists headed by
BoE governor Mervyn King, is supposed to identify
macro-prudential risks to UK financial stability - housing
bubbles, for example. Its judgment back in November that banks’
risk-weighted asset calculations might not be sufficiently
conservative, and that they might not have fully provisioned
against future loan losses or regulatory fines, was reasonable
enough. That said, it seemed to stray into the domain of the
banks' new direct regulator, the Prudential Regulation
Authority, which is also part of the BoE.
The FPC followed up its analysis in March, saying the
capital hole was only 25 billion pounds. The explanation for the
reduction was that the BoE was only formally requiring banks to
achieve a 7 percent core Tier 1 ratio under tough new Basel III
But now the PRA has declared that RBS and Lloyds at least
can hit the targets by restructuring their businesses. All of
sudden, the need to raise capital externally has disappeared.
There are two problems with this. One is that other European
banks like BNP Paribas (BNPP.PA) and Intesa SanPaolo (ISP.MI)
already sport 10 percent core Tier 1 ratios, so UK banks hardly
look robust in comparison. The other is that following an April
letter from the UK Chancellor George Osborne to the BoE
implicitly warning not to overburden banks during the recovery,
the FPC looks like it has been overruled.
True, as banks like Lloyds and RBS shed non-core assets they
should be able to get up to continental levels in a few years.
But in letting the 50 billion pound figure out the bag, the FPC
has implied that this pace is too slow. It would have been
better off washing UK banks’ dirty linen behind closed doors.
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- Royal Bank of Scotland and Lloyds Banking Group both said
on May 22 that they would not have to raise new capital or
contingent capital but could meet their capital requirements by
restructuring their businesses and growing capital organically.
- RBS said it would continue to change the size of its
Markets division, dispose of non-core assets and partially list
its U.S retail arm. The bank added it was making assumptions as
to RBS profitability and regulatory capital model developments
ahead of Basel III rules in Europe becoming effective.
- RBS and Lloyds shares were up 2.6 and 2.1 percent
respectively at 1140 GMT on May 22.
- Osborne letter to King, April 29:
- Reuters: Lloyds says won't need to issue new equity, CoCos
- For previous columns by the author, Reuters customers can
click on [HAY/]
(Editing by Chris Hughes and David Evans)
Keywords: BREAKINGVIEWS BRITAIN/BANKS
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