Bank of England tells high street giants to increase capital cushion

Picture: PA
Picture: PA
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BRITAIN’S big banks received a stark warning yesterday that they must raise more money after failing to build up big enough cushions to help them survive another financial crisis.

The Bank of England’s financial policy committee (FPC) urged the banks to take action “as early as feasible”, in notes published following its meeting held earlier this month.

The FPC noted that UK lenders had made “some progress” in recent months, with bonuses falling at four of the five biggest banks, but weak earnings meant capital levels were not yet high enough.

It conceded that banks had gone as far as they could to raise capital by keeping down pay and dividends, and called on the UK government to give it powers to force banks to raise fresh capital if they resisted.

The British Bankers’ Association (BBA) said banks had “already restructured” and warned further tightening could risk the amount they could lend.

The trade association said: “We have always recognised the need to raise capital to help ensure a stable banking system. UK banks – and indeed those in the US – have already restructured and raised additional capital and are well on the way to meeting Basel III requirements. We hope others will move swiftly to do the same.

“One word of caution: there must be a careful balance between capital held on the one hand and having funds available on the other to support business and growth,” it added.

The FPC’s warning came after an influential analysts’ report on the banks backed up the BBA’s assessment. The note from UBS said the banks’ 2011 annual reports showed that their restructurings were “well into the home straight”. It added that the changing regulatory landscape was “profoundly corrosive to a willingness to extend credit”.

UBS estimated that the UK’s largest banks had an aggregate “Core Tier One” ratio of 13.5 per cent – well ahead of the amount of capital required under Basel III rules next year. The Basel Committee says European banks must have a ratio of at least 6 per cent by 2015, plus an extra 2.5 per cent “buffer” by 2019.

The FPC report said: “The committee remained concerned that capital was not yet at levels that would ensure resilience in the face of the prospective risks.”

The new watchdog will become Britain’s top financial supervisor, as part of a far-reaching change to British bank regulation in the wake of the financial crisis. Currently the FPC only has powers to recommend banks take action, but from next year it will be able to give them orders.

The committee – echoing previous comments from the central bank – said financial market tensions had eased after the European Central Bank pumped billions of euros into lenders since the FPC’s last meeting in December.

This has helped British banks to raise long-term debt finance and revived their share prices by a third, and it was now cheaper to insure against them failing to pay back their debts.

“The committee agreed, however, that conditions remained fragile,” the Bank of England said. “Questions remained about the indebtedness and competitiveness of some European countries.

“Banks with large exposures to those countries… should be particularly alert to the need to build capital,” it added.