BRITAIN’S banks had a collective capital shortfall of £25 billion as of the end of last year the Bank of England has warned, sparking fears that rectifying this could put further pressure on institutions to cut lending.
While the Bank Financial Policy Committee (FPC) did not name any banks, analysts believe its concerns centre on part-nationalised Royal Bank of Scotland and Lloyds Banking Group, owner of Bank of Scotland, and Barclays.
And investors concluded Edinburgh-based RBS has the biggest challenges, sending its shares down 3.1% as the others benefited from a relief rally.
The FPC said further losses on property loans, eurozone exposure, fines for previous misconduct and a more prudent approach to assessing the risk on current loans may hit UK bank capital.
It gave institutions until the end of the year to plug the gap but said measures in train will take them half way there and there is no need for another taxpayer injection.
The news sparked fears banks will have an incentive to further cut back on lending.
Business Secretary Vince Cable told Sky News: “The idea banks should be forced to raise new capital during a period of recession is an erroneous one.
“This FPC exercise will prolong the time it takes for the British economy to recover by further depressing already-weak SME (small and medium-sized enterprise) lending.”
Matthew Fell, director for competitive markets at the Confederation of British Industry, said: “While the FPC wants banks to meet additional capital levels in a way that will not restrict lending, it is difficult to see how this can be achieved in practice.”
And Richard Barfield, director at accountant PricewaterhouseCoopers, said: “Without external capital raising, the principal way for banks to achieve more demanding capital ratios would be to reduce lending or carry out more de-leveraging, which is not conducive to economic growth.”
But Bank Governor Sir Mervyn King said the measures will encourage lending.
“A weak banking system does not expand lending,” Sir Mervyn said. “The better capitalised banks are the ones expanding lending, and it is the weaker capitalised banks that are contracting lending.”
The capital shortfall was half what many had feared.
Barclays’ shares rose 0.7p, or 0.2%, at 287.9p. Lloyds closed up 1.05p, or 2.2%, at 48.7p.
But RBS finished down 8.9p, or 3.1%, at 277.1p.
A RBS spokesman insisted: “RBS has a strong capital position and last month announced plans to strengthen it further. Like all other banks we will continue to work with our regulators to ensure RBS remains at the forefront of international capital standards.”
Marc Kimsey, senior trader at Accendo Markets, said: “RBS has spooked the trading floor with its unprovoked statement following the Bank of England announcement regarding capital shortfalls this morning.”
Andrew Bailey, Deputy Governor of the Bank of England, said plans banks have already should deal with half of the £25bn shortfall.
RBS – 82% owned by the taxpayer – said it will sell up to a 25% stake in its US bank Citizens and further run down its investment bank.
Lloyds, 41% state-owned, has sought to protect itself by taking large provisions for bad debts and compensation for mis-selling.
Barclays has issued securities into the market and revealed plans to slim down its operations.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article