(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 rules.
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.
- 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: here
- Reuters: Lloyds says won’t need to issue new equity, CoCos [ID:nL6N0E30JV] - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Chris Hughes and David Evans)
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