LONDON - The Bank of England recommended Wednesday that the nation’s lenders increase their capital buffers by $37.8 billion by the end of the year to ensure they can cover potential losses and keep lending in the event of future crises.
Banks need to set aside more money to cover potential losses on commercial real estate and from the euro area, possible fines for misselling and stricter risk models, the Bank of England said after a report by the Financial Services Authority. The Bank of England didn’t identify or quantify the number of lenders that need to bolster capital, and it said plans already announced by banks should cover about half the shortage.
“It’s a bit of a damp squib,” said Simon Maughan, an analyst at Olivetree Securities in London. “The banks are going to have until the end of 2013, at least, to do it, and there was no change to the message that they won’t need to raise fresh capital or restrict dividend payments.”
The Bank of England is pushing banks to increase resilience so they can increase lending and fund an economic recovery. The bank’s focus on loan losses could still hit Royal Bank ofScotland and Lloyds Banking the most because of their commercial real-estate holdings, and Barclays Plc, with its investment-banking unit, would be most affected by the changes to risk weights, Maughan said. the Royal Bank of Scotland and Lloyds have announced asset sales this year to bolster capital, and Barclays plans to sell contingent convertible notes.
The Bank of England said that expected loan losses could exceed provisions by $45 billion and future fines and conduct-related penalties could be $15 billion more than banks expect. It said lenders underestimated assets weighted for risk by $257 billion, leading to a $18 billion capital shortfall in that category.
The full effect of the three areas could deplete lenders’ capital by $75.6 billion, less than the $90.7 billion estimate that emerged from the Bank of England’s November Financial Stability Report. Some banks already have enough resources to cover them, paring the shortfall to $37.8 billion, the Bank of England said.
Bank of England Governor Mervyn King said the shortfall “is not an immediate threat to the banking system and the problem is perfectly manageable.” He also said the recommendationswon’t require additional government investment in banks.
Officials at HSBC Holdings, Lloyds and the Royal Bank of Scotland declined to comment. Barclays said in a statement it has a “clear plan” to reach its capital target by 2015.
Since the Bank of Englandasked the Financial Services Authority in November to examine capital levels, banks have announced asset sales and other plans to bolster balance sheets. Lloyds sold a stake in asset manager St. James’s Place, booking a $605 million gain, and the Royal Bank of Scotland said last month that it will sell its U.S. operation and shrink its securities unit.
“We know what the plansof the banks are,” Bank of England Deputy Governor Andrew Bailey said, adding that about half the shortfall should be covered in those proposals. “We are not saying that those plans are absolutely baked in and have been given a seal of approval. They will be scrutinized.” Information for this article was contributed by Howard Mustoe, Gavin Finch, Fergal O’Brien and Keith Campbell of Bloomberg News.
Business, Pages 25 on 03/28/2013