In its Financial Stability Report (FSR), the Bank revealed that the big four lenders - RBS, Lloyds, Barclays and HSBC - may need to take £15bn of extra provisions on consumer loans and European debt, “a further £4bn-£10bn” to cover fines and customer compensation, and “between £5bn and £35bn” to meet regulatory risk standards.
Sir Mervyn King, the Bank’s Governor, said the potential losses distorted the “picture of banks’ health” and that lenders may have to “raise capital or take steps to restructure”. He added: “The danger to be avoided is that of inadequately capitalised banks holding back our recovery.”
However, he stressed that no more taxpayer money would be put on the line. “It was made very clear that the Treasury did not want to put more into the state-owned banks,” he said.
Markets have lost confidence in the banks due to their “complex and opaque” numbers and, to recover investors’ trust, lenders need to set aside capital for “expected losses” and for potential compensation and fines over customer mis-selling and Libor rigging, the Bank said. Risk levels also need to be calculated more prudently.
The decision was taken after last week’s meeting of the Financial Policy Committee. In the most dramatic intervention since the £67bn bail-out of lenders from RBS to Lloyds, the proposal will see regulators from the Financial Services Authority sent into banks and building societies to ensures losses are properly declared by March next year.
However, the Bank declined to put a single number on the scale of potential recapitalisations, stressing that it would depend on the FSA judgement on each individual bank. Sir Mervyn added: “The problem is manageable, and is already understood at least in part by markets.”
Bank shares reacted favourably as fears of a worse outcome proved unfounded. Barclays shares closed up 1pc at 244.6p, RBS was 1.5pc higher at 299p, and Lloyds rose 1.5pc to 46.64p. Jason Napier, an analyst at Deutsche Bank, said: “Overall, the FSR is in line with our expectation, and in areas the report is better than we had feared.”
The plan could lead to a shake-up of the industry with rights issues, asset sales, and disposals – so long as they “do not hinder lending to the real economy”.
Barclays has already raised $3bn (£1.8bn) in contingent capital, Royal Bank of Scotland has previously been asked by the regulators to consider selling its US operation Citizens, and Lloyds Banking Group is rumoured to be looking at the disposal of its stake in wealth manager St James’s Place.
Sir Mervyn said: “The recommendation we have made will soon get the banks back to a position where they can support our economic recovery.”
The Bank also released separate data yesterday showing that write-offs by UK banks fell to £3.5bn in the third quarter from £4bn in the previous three months – well below the peak of £6.3bn in 2011 and the lowest since 2009. Citi’s economist Michael Saunders said: “The drop may be a symptom of increased banking forbearance and reluctance to face losses .”
The Telegraph
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