Newspaper article International Herald Tribune

Banks Need More Capital, British Report Says ; Pounds 25 Billion Cushion Is Call for to Protect against Future Shocks

Newspaper article International Herald Tribune

Banks Need More Capital, British Report Says ; Pounds 25 Billion Cushion Is Call for to Protect against Future Shocks

Article excerpt

After a five-month inquiry, the Bank of England has ordered banks to raise capital to protect them from losses connected to risky loans, regulatory fines and balance sheet problems.

CORRECTION APPENDED

British banks must raise a combined Pounds 25 billion in new capital by the end of the year to protect against future financial shocks, according to a report from the country's authorities.

The Bank of England, which takes over the direct supervision of British banks like HSBC and Barclays next week, said Wednesday that the new $38 billion in reserves were needed to protect against losses connected to risky loans, future regulatory fines and the readjustment of banks' bloated balance sheets.

Mervyn A. King, the departing governor of the Bank of England, said Wednesday that the need to raise new capital was "not an immediate threat to the banking system and the problem is perfectly manageable."

The report follows a five-month inquiry by British officials into the financial strength of the country's banking industry. With the world's largest financial institutions facing new stringent capital requirements, the Bank of England had been concerned that British banks did not have capital reserves large enough to offset instability in the world's financial industry.

Earlier this month, the Federal Reserve released the results of so-called stress tests of America's largest banks; the tests indicated that most big banks had sufficient capital to survive a severe recession and a major downturn in financial markets. Citigroup and Bank of America, after disappointing performances the previous year, now appeared to be among the strongest.

British banks were not so lucky.

The report released Wednesday said that local banks had overstated their capital reserves by a combined Pounds 50 billion, which the authorities said would be adjusted on the firm's balance sheets. Many of the country's banks already have enough money to handle the accounting adjustment, the report said.

The country's regulators also said that British banks must raise a total of Pounds 25 billion in new capital by the end of the year, but the authorities say they believe about half of that amount has already been allocated under the banks' capital-raising plans for 2013. The Bank of England did not name which firms needed to meet the shortfall.

Analysts said that many of the affected firms had enough time to raise new capital by the end of the year, despite the market volatility caused by the banking crisis in Cyprus.

Local regulators have set a deadline of the end of 2013 for banks to increase their reserves to a core Tier 1 capital ratio, a measure of a bank's ability to weather financial crises, of at least 7 percent under the accounting rules known as Basel III. …

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