29 November 2012 Last updated at 10:27 ET
Sir Mervyn King: “This problem is manageable, but it requires some action now”
Major UK banks may need to raise more capital as protection against possible future losses, the Bank of England’s Financial Policy Committee has said.
Bank governor Sir Mervyn King said there were “good reasons” to think current capital ratios did not give an accurate picture of financial health.
His comments came as he presented the Bank’s Financial Stability Report.
The report suggested that the ‘Big Four’ UK banks need £5bn-£35bn of new capital.
However, BBC business editor Robert Peston said, “the precision of this calculation is somewhat to be questioned because it is based on 2011 data and also because it excludes the banks’ huge financial trading activities”.
The main UK banks include HSBC, Barclays, Royal Bank of Scotland and Lloyds.
‘Immediate attention’ needed
Sir Mervyn said: “UK banks currently report substantial buffers over the minimum level allowed”.
Sir Mervyn and his colleagues on the FPC may today have engineered yet another significant delay to the moment when taxpayers can celebrate severing the ties that bind us to Lloyds and RBS”
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“But, in judging whether banks are adequately capitalised, we need to ensure that reported capital ratios do in fact provide an accurate picture of banks’ health. At present there are good reasons to think that they do not.”
He said there were three reasons why the Bank of England thought that the banks were not strong enough.
“First, expected future credit losses may be understated. Second, costs arising from past failures of conduct may not be fully recognised. And third, the risk weights used by banks in calculating their capital ratios may be too optimistic”.
Sir Mervyn added: “The problem is manageable, and is already understood at least in part by markets. But it does warrant immediate attention.”
Mis-selling costs
Inadequately capitalised banks hold back economic recovery and undermine investor confidence, he added.
The Bank is being granted greater regulatory oversight over banks from next year when it takes over the Financial Services Authority. One of its primary roles will be to make sure UK banks have sufficient capital to support the economy, said Sir Mervyn.
Adequate capital levels are also needed in the face of rising costs related to banking scandals.
This year, HSBC and Barclays were respectively hit by penalties over money-laundering and the alleged rigging of the Libor rate.
Meanwhile the banks have set aside billions of pounds to cover claims for payment protection insurance (PPI) mis-selling.
“In recent years, UK banks have also underestimated and underprovisioned for costs for conduct redress, notably for payment protection insurance (PPI) mis-selling,” the stability report said.
“In 2012, the number of identified conduct issues has grown and it seems likely that banks could face additional sizable costs.”
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UK banks ‘may need more capital’
