Banks on the rise as RBS bounces into black and regulator goes easy

The relative restraint of the Bank of new leverage requirements provided much-needed relief

Shares in Britain’s banks surged yesterday as new rules on the cash they must hold as a proportion of loans turned out to be less onerous than feared and Royal Bank of Scotland converted last year’s third-quarter loss into a thumping profit.

The relative restraint of the Bank of England’s new leverage requirements, announced yesterday, provided some much-needed relief. The sector has been reeling after a week dominated by news of the huge provisions that banks are taking to handle the huge fines expected for the foreign exchange trading scandal.

RBS was the latest to take a hit, setting £400m aside, while warning that there may be more to come. However, a strong improvement in Irish property prices, lower bad debts and lower costs saw the third-quarter loss of £634m recorded in 2013 turned into a profit of £1.27bn in the same period this year.

Its shares gained 6 per cent, but Barclays was the star performer. Within seconds of the Bank’s announcement, its shares leapt from 227.5p to 239.1p, a level not seen since the summer.

Analysts had viewed the bank as the most exposed should the Bank opt for a tough line on leverage – the amount of capital that banks have to hold for every pound lent, regardless of risk.

Some had feared £5 for every £100, but the base level will be £3 for every £100 advanced. Britain’s globally important banks will face an additional buffer of up to £0.875 that they will have to reach by 2016. By 2019 that could be raised to a maximum of £4.05 both for these institutions and other big domestic banks.

The Bank will have furthers powers to tack on during boom times to create a safety net when the economy gets rocky, which could bring the total to £4.95 – or 4.95 per cent.

The rules mean Barclays will have to hit 3.7 per cent by 2016 – beneath the 4 per cent target that it had set itself for that time. It may now reach this level within the next few financial quarters.

Leverage ratios have been criticised because they apply the same weight to low-risk lending, like mortgages, as higher-risk unsecured personal loans or credit card debt.

Investec’s banking analyst, Ian Gordon, said: “A leverage ratio, by its very nature, makes low-risk lending less attractive. As such, the announcement of new leverage requirements was always an exercise in damage limitation.

“In our view, one should not underestimate the scale of [permanent] costs imposed on the British public, in terms of higher mortgage costs, than would otherwise have been the case. Be that as it may, we think the proposals are eminently manageable – a clear relief for Barclays and positive for mortgage banks more generally.”

Speaking as RBS revealed its numbers, the chief executive, Ross McEwan, said: “We are actively managing a slug of significant legacy issues. For some of them the cheques are already in the post, but there are plenty more bumps in the road ahead.”

RBS also has outstanding cases against it over US mortgage-backed securities and its IT collapse two years ago.

Analysts feel that there is little chance the Government will sell its first tranche of RBS shares before next year’s general election.