Bank of England to banks: raise $37.7 billionStaff writer ▼ | March 27, 2013
The Financial Policy Committee (FPC) discussed work by the Financial Services Authority (FSA) which had examined major UK banks and building societies. It had advised that expected losses which might arise over a three year period on specific high-risk loan portfolios, including exposures to UK commercial real estate and vulnerable euro-area economies, could exceed existing provisions by around GBP30 billion.
FSA also said that it had identified future conduct costs arising over a three year period could exceed provisions by around GBP10 billion; and that a more prudent approach to risk weights in the banking book would raise risk-weighted assets by some GBP170 billion (equivalent to roughly GBP12 billion of capital at a 7% equity capital ratio). Taken together, the effect of these three adjustments would be equivalent to around a GBP50 billion reduction in the regulatory capital of the major UK banks and building societies.
The actions that banks need to take depend on whether, and if so how far, their adjusted capital falls short of the level that the FPC judges banks need to ensure sufficient capacity to absorb losses and sustain lending in the current conjuncture. The FPC judged that the immediate objective should be to achieve a common equity tier 1 capital ratio, based on Basel III definitions and after the required adjustments, of at least 7% of risk-weighted assets by end 2013.
Some banks, even after the adjustments described above, have capital ratios in excess of 7%; for those that do not, the aggregate capital shortfall at end 2012 was around GBP25 billion. ■