LONDON - British banks must raise a combined £25 billion ($38 billion) in new capital by the end of the year to protect against future financial shocks, according to a report from local authorities on Wednesday.
The Bank of England, which takes over the direct supervision of British firms like HSBC and Barclays next week, said the new reserves were needed to protect against losses connected to risky loan portfolios, future regulatory fines and the rejiggering of banks’ bloated balance sheets.
The announcement follows a five-month inquiry by British officials into the financial strength of the country’s banking industry. With the world’s largest financial institutions facing new stringent capital requirements, the Bank of England had been concerned that local firms did not have large enough capital reserves to offset ongoing instability in the world’s financial industry.
Earlier this month, the Federal Reserve also released the results of so-called stress tests of America’s largest banks, which indicated that most big banks had sufficient cash to survive a severe recession and major downturn in financial markets. Citigroup and Bank of America, after disappointing performance the previous year, now appeared to be among the strongest.
British banks are not so lucky.
The reported released on Wednesday said that local banks had overstated their capital reserves by a combined £50 billion, which authorities said would now be adjusted on the firm’s balance sheets. Many of the country’s banks already have enough cash to handle the accounting adjustment, the report said on Wednesday.
The country’s regulators also said that British banks must raise a total of £25 billion in new capital by the end of the year. The Bank of England did not name which firms needed to meet the shortfall.
Local regulators have set a deadline for the end of 2013 for banks to increase their cash reserves to a core Tier 1 capital ratio, a measure of a bank’s ability to weather financial crises, of at least 7 percent under the accounting rules known as Basel III.
Regulators on Wednesday called on banks to increase their cash reserves by raising new equity, selling so-called non-core assets, or restructuring their balance sheets. British policymakers are concerned that firms will cut lending to the local economy as part of their efforts to increase their cash reserves.
As part of increased oversight of British banks, the Prudential Regulatory Authority, a newly-created division of the Bank of England that will have daily regulatory control of the country’s largest firms, will have a direct say in how banks raise the new capital.
The authority’s board is expected to meet over the next couple of weeks to decide which banks will be forced to raise new money. British firms must receive regulatory approval for their capital raising plans.
Attention will likely focus on both the Royal Bank of Scotland and Lloyds Banking Group, which both received multi-billion dollar bailouts during the financial crisis. The part-nationalized banks have recently announced the sale of some of their divisions, including Royal Bank of Scotland’s American operation, Citizens Bank, in a bid to raise new funds.
“We see R.B.S. as most exposed,†Citigroup analysts said in a research note to investors on Wednesday.
Others firms are taking a different route. In November, Barclays issued $3 billion of so-called contingent capital, or CoCo bonds, which converts to equity if a bank’s capital falls below a certain threshold.
The push to increase cash reserves for Britain’s largest banks is part of an effort to prevent future financial crises. Starting in 2014, the Bank of England plans to conduct regular stress tests of the country’s financial institutions to check they have sufficient capital reserves.
