UK banks could need extra £22bn to cover mortgages risks

By STEVE SLATER
Published on 06/10/2012 00:00

Britain’s banks could need up to £22 billion more capital if regulators follow through with threats to change the risk weightings they apply to mortgages in assessing the size of their loan books, analysts have estimated.

Morgan Stanley analysts expect banks to be told to increase risk weightings which could require between £10bn and £22bn of extra capital.

The Bank of England’s financial policy committee (FPC) last week said the potential for banks to assign different risk weights was “a matter of concern” that it would monitor. A week earlier, the Treasury said the FPC should have the power to require banks to hold more capital if it is worried about mortgage exposures.

US banks have long accused their European rivals of “optimising” risk weights to push down how much capital they need to hold, and this week the Basel Committee of the world’s banking regulators slammed Europe’s failure to apply rules properly.

Big banks are allowed to use their own models to assess how risky a mortgage or other loan is, under the internal ratings based (IRB) approach. It is based on banks’ own analysis of the past performance of their loan portfolios, and has to be approved by regulators.

However, that allows them to apply some low risk weightings. Lloyds Banking Group, for example, applies an average risk weight of 16 per cent for mortgages, but that includes an average risk weight of 2.2 per cent for £143bn of high-quality loans, Morgan Stanley said. That means the bank applies a risk-weighted asset value of only £3.15bn to those mortgages, so only needs to hold £315 million of core capital to cover the £143bn.