Britain's largest banks have been told by their regulators that they must raise up to £60bn more capital to cover likely losses from bad loans, fines for misconduct and overly aggressive accounting practices.
The Bank of England Governor, Sir Mervyn King, made the announcement yesterday as he unveiled the central bank's latest Financial Stability Report. Sir Mervyn said there are "good reasons" to believe that the UK's financial institutions are inadequately capitalised.
The Financial Services Authority will, over the coming months, instruct individual banks to raise more capital. Sir Mervyn, the chair of the incoming super regulator, the Financial Policy Committee, did not put a figure on the overall size of the UK bank capital hole, only describing it as "material".
But the analysis cited within the report give some indication of the problem. It notes that banks might not be provisioning adequately for £15bn of problematic loans. It suggests that fines for Libor manipulation and payment protection insurance could be between £4bn and £10bn. And it points out that variations in the "risk weights" used by different banks to decide how much capital to hold against their assets could have resulted in equity buffers being overstated by between £5bn and £35bn. That would point to a capital hole of as much as £60bn.
Sir Mervyn said banks' share prices were low because investors did not believe that they held sufficient capital buffers to protect them in a future crisis. "Our aim must be to get to a point where private investors again have confidence in banks," he said.
In 2008 and 2009 the Royal Bank of Scotland and Lloyds Banking Group were recapitalised with £65bn in taxpayers' money. But Sir Mervyn said the Treasury had made it clear no further money would be coming from the public purse this time. "It was made very clear that the Treasury did not want to put new capital in to the state-owned banks," he said. "That's perfectly understandable, rather sensible, but this recommendation does not imply that the state will have to do that."
Banks will be required to raise more capital in three ways — raising more capital externally, issuing contingent capital (debt that converts to equity in a crisis) and disposing of non-core assets. The report said that since 2009 the banks have improved their capital ratios by deleveraging, rather than raising new equity.
The Governor also said without recapitalisation the wider economy would suffer. "The choice we face is to tackle the situation head on, which will be difficult and in some quarters unpopular, or to suffer a prolonged period of adjustment in which an inadequately capitalised banking system holds back recovery in the wider economy."
Tucker's tight-lipped on his future
Paul Tucker, who was beaten to the job of Governor by the Canadian central banker Mark Carney last week, declined to comment on his Threadneedle Street future yesterday. Asked at a press conference whether he intended to see out the remainder of his term as deputy governor to February 2014 he replied: "I'm the Deputy Governor for Financial Stability. There's a job of work to be done, I'm doing it."
When pressed he repeated: "I'm the Deputy Governor of Financial Stability and I'm doing that job."