Lenders face tougher capital rules

Britain’s banks may be forced to hold more capital than their international rivals under plans being drawn up by the Bank of England to prevent another financial crisis.

Paul Tucker: Stress tests help restore confidence in banks. Picture: PA

Spelling out proposals for annual “stress tests” for the largest lenders, such as Barclays, HSBC and Royal Bank of Scotland, the central bank said the results of its first exercise would be published by the end of next year.

Under international guidelines known as Basel III, banks will have to hold total capital worth 8 per cent of their investments in risky assets by 2019, but British lenders could face even tougher requirements.

The Bank of England said: “At the very least, banks would need to maintain sufficient capital to be able to absorb losses in the stress scenario and not fall below internationally agreed minimum standards. But the level of capital that banks would need to maintain in the stress scenario could be set above strict internationally agreed minima and vary across banks.”

Deputy governor Paul Tucker, who stands down on 18 October to join Harvard Business School, said regular stress tests would help to underpin confidence in the sector, which was rocked in 2008 when RBS needed a £45 billion taxpayer bail-out.

The British Bankers’ Association said: “These new proposals should reinforce confidence in the financial system by letting regulators make judgments that balance systemic stability with the need to support growth.”

In June, five lenders – Barclays, Co-operative, Lloyds, Nationwide and RBS – were told they needed to find an extra £27.1bn to meet a risk-weighted capital ratio of at least 7 per cent, but Business Secretary Vince Cable has warned that demands to beef up lenders’ balance sheets could stem the flow of credit to small firms.