Britain’s banks must raise £25 billion of extra capital by December to absorb any future losses on loans, the Central Bank said, less than investors had originally expected.
The Bank of England said yesterday that major lenders should achieve a core tier 1 capital ratio – a bank’s main benchmark of health – of at least seven per cent of their risk-weighted assets.
Replenishing capital buffers, decimated by the financial crisis and heavy fines for misconduct, is crucial to returning part state-owned lenders RBS and Lloyds to full private ownership by the 2015 general election.
The move to strengthen banks should also allow them to lend more and support economic growth, Central Bank governor Mervyn King said.
He said the banks will not need taxpayers’ money to increase their capital.
Matthew Fell, a director at UK business lobby the CBI, said it was difficult to see how banks can meet the capital targets without restricting lending.
Along with RBS and Lloyds, two other banks, HSBC and Barclays dominate the market with 74 per cent of deposits. Banks have already announced some plans to bolster capital which, along with their expected earnings this year, should cover half of the £25 billion shortfall.
The amount they have to raise is less than investors had expected after the Central Bank said last year the figure could be as high as £60 billion.
Shares in RBS were down 0.4 per cent while Lloyds jumped 3.1 per cent, with HSBC up 0.1 per cent and Barclays up 0.8 per cent.
“You can pretty much guess HSBC is going to be in surplus and that Barclays, RBS and Lloyds have probably got a shortfall and I would guess the shortfall is probably biggest at RBS,” Shore Capital analyst Gary Cooper said.
The Central Bank did not give a breakdown of how much each bank needs to raise.
Banks are expected to say how they will raise the money in the next few weeks. Analysts say they will likely curb dividends and bonuses, although some new capital will be needed.
Banks will have to hold a set amount of capital so they are not tempted to cancel loans to bump up their capital ratios.
Those that hold large amounts of risky commercial property or are exposed to struggling eurozone countries such as Greece or Spain will have to hold even more capital above the seven per cent target.
RBS said its capital position was strong and that it was working with regulators, while Barclays said it was “profitable, strong and well-capitalised”.
Santander UK said it would continue to maintain its capital ratios above the industry average.
HSBC and Lloyds declined to comment.
Yesterday’s announcement outlined two phases: the December deadline for the minimum capital level, five years earlier than the globally agreed timetable under the Basel III accord, and regular stress testing of banks beyond 2014 that will lead to further capital increases.
The big banks are expected to have capital ratios of 10 per cent by the end of 2018.