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Comment: Bank’s bombshell blows away any complacency

Martin Flanagan

Martin Flanagan

  • by MARTIN FLANAGAN
 

THE shocks keep coming for the UK banking industry. The sector thought it had made substantial progress on beefing up bank balance sheets from the bad old days before the Lehman Bros’ collapse in 2008. Certainly healthier capital reserves than many banks in the beleaguered eurozone.

But the Bank of England lobbed a grenade into the sector yesterday by saying much more needed to be done to boost capital buffers against shocks.

In fact, the Bank said that Britain’s four biggest banks – HSBC, Barclays, Royal Bank of Scotland and Lloyds – might have to increase their capital reserves by up to £35 billion to be adequately covered on future bad debts and mis-selling scandals such as Payment Protection Insurance (PPI).

The banks should not be surprised. Sir Mervyn King, governor of the Bank of England, warned in a speech only recently that further big debt write-offs might be needed if we were to move on from the financial crisis.

Many observers believed the governor was hinting strongly that the banking industry remained in denial on the scale of asset writedowns required.

In his return to the subject, King now warns of a black hole at the heart of Britain’s banks that is threatening to hobble the nation’s recovery.

He said confidence had been rattled by the “complex and opaque” way banks applied capital to the various risk assets held on their balance sheets, thereby risking overstating their financial strength.

Some of this is arcane. But the language is unusually forthright from Britain’s central bank, speaking of “material implications for the adequacy of banks’ capital buffers”.

For this still to be the case after taxpayer bailouts, dividend freezes and big asset sales is worrying. A key tenet of what the BoE is saying seems to be that banks have consistently underestimated the size of bad loans on their books and the levels of financial redress they will be responsible for regarding mis-selling.

A good example is Libor-manipulation, where Barclays’ fine of £290m is seen by many banking analysts as just the tip of the iceberg. RBS should find out how much it is in the hole for with regard to Libor over the next couple of months.

Some analysts reckon the big banks could be looking at a range of £4bn to £10bn for so far unrecognised PPI and Libor-related costs alone.

Of course, what King is most worried about is that the still substantial black hole at the heart of Britain’s banks will rein in their lending and hinder the recovery. In short, the industry is not out of the woods.

Wait and see if retail fillip is just for Christmas

WE SHOULDN’T get too excited about the latest CBI survey showing that retail sales volumes rose in November at their fastest pace since June.

While any good news is welcome, why wouldn’t high street sales pick up as we begin the run-up to Christmas?

And the latest rise is also from a low base as consumers have tightened their belts for over four years since the onset of the first part of what became a double-dip recession.

You only have to look at retail collapses and depressed trading performances across a swathe of the high street – including Dixons and B&Q owning Kingfisher yesterday – to know the pressures the sector is under.

If UK Retail has a good Christmas and it carries forward into the first couple of months of next year there may be reason for applause. But not yet.

 

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