British Banks May Be Undercapitalized, Bank of England Governor Warns

LONDON - Britain's banks need more capital to protect them against fallout from the crisis in the euro zone, the Libor litigation and other potential costs, the Bank of England warned Thursday.

Current capital ratios at major U.K. banks - a measure of the banks' ability to withstand financial shocks - are probably overstated because possible future losses and costs of bad loans or other past business decisions might be bigger than expected, the British central bank said in its latest report on financial stability.

It 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 in a press briefing as he presented the report. “At present there are good reasons to think that they do not.”

Capital ratios of Britain's four biggest banks - Barclays, Royal Bank of Scotland, Lloyds Banking Group and HSBC - could be overstated by between £5 billion, or $8 billion, and £35 billion, according to a hypothetical example in the report. That means that the banks would, under certain scenarios which 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 thinks 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 instead. He has repeatedly warned during his tenure that banks' capital cushions were 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 funding for banks if they commit to increase 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.

Mr. King did not suggest that banks were dishonest in booking provisions or taking into account future possible losses, but that reporting standards did not require them to be more vigilant and therefore many banks are unwilling to be more prudent about possible future losses.

The additional capital is needed because even though the sentiment in financial markets “improved a little,” global growth remains weak and “significant adjustments” on debt in the euro zone are still expected, Mr. King said.

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, sparking 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 ongoing 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 cheaper for them to raise money in the financial markets, Mr. King said. “Our aim must be to get to a point where private investors again have confidence in banks and banks themselves have the confidence to lend,” he said.

A version of this article appeared in print on November 30, 2012, in The International Herald Tribune.