LONDON (Reuters) - Lloyds Banking Group (LLOY.L) must plug a capital shortfall of 8.6 billion pounds ($13.5 billion), Britain's banking regulator said on Thursday, a day after the government signaled plans to return the part-state owned lender to the private sector.
Britain is trying to restore confidence in a banking sector that had to be shored up by taxpayers during the 2007-09 financial crisis. Apart from the large minority stake in Lloyds, it also owns 81 percent of Royal Bank of Scotland (RBS.L).
The Prudential Regulation Authority (PRA) said the aggregate capital shortfall at five UK banks at the end of 2012 was 27.1 billion pounds, slightly higher than its 25 billion initial estimate in March this year.
The banks had already outlined plans in March to raise 12.5 billion pounds during this year - roughly half the total shortfall - and the PRA raised this estimate to 13.7 billion on Thursday.
The aim is for banks to have a core capital buffer equivalent to 7 percent of their risk-weighted assets by December, the minimum level under new global Basel III capital rules now being phased in.
In a new move, the PRA also set a leverage ratio of 3 percent for UK banks with immediate effect, which effectively limits the amount they can lend based on their capital. This is five years earlier than a globally agreed deadline.
RBS, which the government has said will take longer to return to full private ownership, had a total capital shortfall of 13.6 billion pounds at the end of December, Lloyds 8.6 billion and Barclays (BARC.L) 3 billion, the PRA said.
The PRA said Barclays' leverage ratio fell short of its new requirement at 2.9 percent, and would be only 2.5 percent after adjustments. It said Barclays and Nationwide must submit plans by the end of this month to reduce leverage.
Barclays said its restructuring plans include a reduction in leverage "over time" and it would keep the market updated as required.
Lloyds has already announced plans to raise 5.8 billion pounds in capital and on Thursday said it expects to meet the remaining 2.8 billion requirement through capital generation and won't need to issue hybrid debt or shares.
Finance Minister George Osborne said on Wednesday that Britain was ready to start selling shares in Lloyds and would consider breaking up RBS.
Barclays said it can fill its 3 billion pound gap from earnings and other restructuring measures and does not plan to issue new shares. RBS said in a statement it expects to continue to improve its core capital ratio during this year.
The PRA said the Co-op had a shortfall of 1.5 billion pounds and Nationwide 400 million pounds. There were no shortfalls at HSBC (HSBA.L), Standard Chartered (STAN.L) or Santander UK (SAN.MC), the watchdog, part of the Bank of England, said.
"A number of these intended actions will require regulatory approval before being implemented. As such, they cannot be assumed to have contributed to meeting the requirement until approval is given," the PRA said.
"In the event that they are either not carried out or fail to be approved, other actions will be required of those firms in order to reach the specified standard."
The PRA said it has given some flexibility by allowing some banks to complete actions during the first half of 2014.
After the actions planned so far, four banks will still have a shortfall and they have been required to submit plans for additional actions.
($1 = 0.6386 British pounds)
Additional reporting by Steve Slater; Editing by Mark Potter