Chinese Version
18 Jun 2013

British Banks to Raise an Extra $21 Billion in Capital

From left, George Osborne, Roger Gifford and Mervyn King at London's annual merchants and bankers dinner.

 

LONDON – British authorities on Thursday told five of the country’s largest banks to raise a combined £13.4 billion, or $20.7 billion, in extra capital by the end of the year to protect against future financial shocks.

The demand is part of an effort by the Prudential Regulatory Authority to strengthen the capital reserves of British banks after many experienced huge losses during the financial crisis.

 

Under the plans outlined on Thursday, British authorities said BarclaysRoyal Bank of Scotland, the Lloyds Banking Group and two smaller lenders must raise the new capital by the end of 2013.

The announcement comes after calls earlier this year for British banks to raise a collective £25 billion to increase their common Tier 1 equity ratios to at least 7 percent under the accountancy rules known as Basel III. The ratio is a measure of a firm’s ability to weather financial shocks.

The Prudential Regulator Authority, which is part of the Bank of England, the country’s central bank, said the combined figure had now been raised to £27.1 billion, though local firms had already put aside £13.7 billion through asset disposals, bond issuances and other capital-raising measures.

Despite the multibillion-dollar figure, many of Britain’s banks have already announced plans to meet the shortfall, and analysts said they did not expect firms to issue new equity to reinforce their capital positions.

“For the largest impacted banks, this is a restatement of old news,” said Ian Gordon, a banking analyst at Investec in London. “The main consequence of this announcement is further damage to banks’ short-term profitability.”

R.B.S and Lloyds, which were both bailed out by the British government during the financial crisis, had the largest capital holes to fill, according to regulators. Both banks outlined their efforts to meet the capital target last month, including the reduction of R.B.S.’s investment banking unit and the sale by Lloyds of its stake in the asset manager St. James’s Place.

In total, R.B.S. must find £13.6 billion by the end of the year, including capital the bank already has set aside, while Lloyds has to find an additional £8.6 billion.

Barclays must also raise £3 billion by the end of the year, and two smaller lenders, the Co-operative Bank and Nationwide, have capital targets of £1.5 billion and £400 million, respectively. To meet its capital needs, the Co-operative Bank said on Monday that it would ask junior bondholders to swap their debt securities for shares in the lender, the first time that a so-called “bail in” of bondholders has been used to recapitalize a British bank since the financial crisis began.

HSBC and Standard Chartered, which both have large operations in emerging markets like China and India, will not have to raise additional capital to meet the common Tier 1 equity ratio of 7 percent.

The regulatory authority also announced on Thursday that local lenders must now hold at least 3 percent of equity against their total assets, also part of the Basel III accountancy rules. While most of the British banks have already met this measure, the figure for Barclays stands at 2.5 percent and the bank must submit a plan to increase the ratio by the end of the month.

In statements, R.B.S., Lloyds and Barclays said they did not plan to issue new equity to meet their capital shortfalls.

Lloyds has sold assets and loan portfolios, while Barclays has issued so-called contingent capital, financial mechanisms that are hybrid between traditional bonds and bank equity. R.B.S. has also shed assets from its balance sheet and has planned the initial public offering of its American unit, the Citizens Financial Group.

Shares in Barclays fell 2.9 percent in morning trading in London on Thursday, while R.B.S.’s stock price declined 1.2 percent and shares in Lloyds dropped less than 1 percent.

The push for many of Britain’s largest lenders to increase their capital positions comes a day after George Osborne, the chancellor of the Exchequer, said the government was moving closer to selling part of its holding in Lloyds, while also weighing a potential breakup of R.B.S.

In a speech on Wednesday, Mr. Osborne said Lloyds’ strengthened position since being bailed out during the financial crisis could now lead to the government begin selling its holding in the bank.

In contrast, R.B.S., whose share price is still far below the figure the British government paid for its stake, was still not close to being privatized, Mr. Osborne said.

He added that the government would now consider separating R.B.S.’s troubled assets from its healthy banking operations in a bid to return the bank to private investors. A decision about its fate will be made later this year, he added.

Analysts said Mr. Osborne’s comments, which mirror similar recommendations earlier this week from an influential British parliamentary committee, would add uncertainty for R.B.S.’s investors.

The bank’s chief executive, Stephen Hester, announced this month that he planned to step down by the end of the year, and questions remain over the government’s influence about how the bank is managed.

“It’s disappointing to see him continue to talk about a good and bad bank option for R.B.S.,” said Mr. Gordon of Investec, referring to Mr. Osborne’s speech. “He’s allowing the debate and uncertainty to continue.”