Tough rules pose new threat to RBS

Published on Tuesday 14 April 2009 21:40

ROYAL Bank of Scotland could be forced into full public ownership if it has to comply with tough new rules on capital reserves proposed by the City watchdog.

Senior bankers fear that RBS and Barclays will have to raise more funds to meet the stringent conditions proposed to ensure that banks can cope with future financial crises.

Lord Adair Turner, chairman of the Financial Services Authority, last month called for banks to be forced to hold larger reserves to provide greater ballast in economic storms.

And although banks have already raised substantial amounts of capital, a senior official at the British Bankers' Association (BBA) yesterday warned that they may have to go further.

Simon Hills, executive director of prudential capital, risk and regulatory relationships at the BBA, said banks like RBS "can never say never" to the potential need to raise more capital.

Hills said he thought banks currently had "appropriate levels of capital to see them through the bottom of the cycle".

He added: "They will have to hold more capital as a result of the requirements on trading book activities. That is why it is important we, regulators and industry, understand how much more capital banks need to raise, if indeed they do. My expectation is they would (raise it] against their trading book assets."

According to Hills, the capital shortage problem becomes "compounded" as assets on the banks' trading books are downgraded, forcing them to hold further capital .

Although Hills refused to comment on individual banks, banking sources point to both RBS and Barclays as likely to need new funds.

They believe that the only way RBS, currently 70 per cent owned by the state, could raise more capital is through more taxpayer involvement – a move that would leave the bank wholly owned by the government. Barclays, which recapitalised using money from the Middle East, could find other sources of funds to boost its capital holdings.

Last night RBS maintained that it had already moved to bolster its capital position.

An RBS spokesman said: "Increased capital requirements have already been anticipated by RBS in our financial strategy over recent months.

"We already hold significantly more capital as a cushion and we have placed a number of lower quality assets into our non-core division for run-off and therefore we would not be holding them by the time any such regulatory requirement came in."

RBS argues that selling off its non-liquid assets from its newly created "non-core division" will ensure that it does not have to make any further recapitalisation moves.

But Sandy Chen, a leading bank analyst at Panmure Gordon, argued that RBS "stands out" among other UK banks due to the size of its trading book. He warned that banks continued to be plagued by risks associated with the declining economy.

Radical reform required if banking is to be rescued

ADAIR Turner's report, published last month, warned that the regulation of banks was "unsafe and untenable" and had to undergo radical reform to prevent a repeat of the banking crisis.

The chairman of the Financial Services Authority (FSA) promised "intense supervision" of financial institutions.

He also called for rules that would require banks to hold larger cash reserves to guard against risky investments. To help prevent another crash, Turner specifically recommended that banks hold larger capital deposits – even if that restricted their profits and made them less attractive to investors.

These reserves would be built up during the "good times", to protect banks during economic downturns.

Banks that dabbled in more risky trading would have to hold more capital, to reduce the risks both to shareholders and customers.

The review of trading book capital proposed by Turner addressed what he described as a "crucial failure of the current capital regime".

Turner said he believed that had played a "major role" in the banking crisis.

Under existing international banking rules known as "Basel II", only "very light levels of" of capital were required against trading books. It was thought risks were low because assets on the books could be easily sold off or unwound.

The report, commissioned by the Chancellor, Alistair Darling, also demanded greater regulatory collaboration between the FSA and the Bank of England.

It also suggested the creation of a European regulator.

It is expected that the recommendations will become law next year after being considered by parliament.

Third Pakistan bank targets Royal business

A THIRD Pakistani financial services group broke cover yesterday with its interest in buying the operations of Royal Bank of Scotland in Pakistan.

Meanwhile, banking shares jumped after US investment banking giant Goldman Sachs's announcement late on Monday of a much higher profit than expected of $1.7 billion (1.1bn) for the first three months of 2009.

Financial services company Jahangir Siddiqui & Co said in a statement to the Karachi Stock Exchange: "JSCL will apply to the State Bank of Pakistan (the country's equivalent to the Bank of England] through the financial advisers of RBS, to obtain the requisite permission to commence due diligence."

Jahangir's move came 24 hours after Habib Bank and MCB Bank registered their interest in the Scots bank's assets in Pakistan.

Those assets were acquired via RBS's acquisition of Dutch banking group ABN Amro in 2007.

MCB is Pakistan's biggest bank by stock market value, while Habib has most branches.

RBS Pakistan has a stock market value of about $266m (179m), but any buyer would be expected to pay more than this.

One London banking analyst said yesterday: "You would expect a premium for control would have to be factored into the current market value."

That business has about 2,000 staff in 80 retail branches across the country, including a presence in leading cities such as Islamabad, Lahore and Karachi.

RBS Pakistan also has a global markets business, providing advisory, financing and other products to corporates and institutions.

An RBS spokesman said: "Local disclosure regulations in Pakistan require bidders to notify the state bank of Pakistan when they formally enter the due diligence process in the bid for the purchase of a local bank.

"The three names we have seen quoted to date, Habib, MCB and JS, have become public as a result of this local reporting requirement."

Following Goldman's results, shares in Lloyds Banking Group and Barclays both closed up about 10 per cent. HSBC was 1.5 per cent better, while RBS edged up 0.7 per cent.

Martin Flanagan