Britain to ratchet up capital requirements for banks

Reuters

By Steve Slater

LONDON, Oct 18 (Reuters) - British banks may have to buildup more capital and more quickly than they expected, forcingfirms like Barclays to rein in dividends toshareholders and restrain bankers' bonuses to find the extracash.

Britain's financial watchdog's plans, still underconsultation, would require the banks to strengthen furthertheir capital safety nets so taxpayers will not have to foot thebill if there is another crisis, bankers and analysts said.

Proposals being finalised by the Prudential RegulationAuthority could result in banks having a capital safety net ofnearly 12 percent of their risk-weighted assets, significantlyhigher than the 10 percent they had been working towards.

"Our analysis of (the) PRA consultation paper indicates UKbanks may need to build to 12-13 percent core equity Tier 1ratio vs current targets of about 10 percent, impacting growthand dividends," Chris Manners, analyst at Morgan Stanley, said.

The banks have already had to more than double the amount ofcapital they hold since the 2008 financial crisis to provide abigger buffer against shocks in the future.

But Britain, which pumped 65 billion pounds ($105.22billion) into Royal Bank of Scotland and Lloyds in the crisis, has said it will "gold-plate" new global capitalrules to give extra protection for taxpayers and depositorsgiven the size of the finance sector.

Britain's banks' balance sheet is more than four times thecountry's GDP, higher than most European countries and above theUnited States, where banks' assets roughly match GDP.

The banks are considered to be adequately capitalised byinternational standards, but now may need to build up more.

"The bar has been raised more quickly than we thought itwould be," Simon Hills, executive director at the BritishBankers' Association (BBA), said. He said banks' main concernwas that the PRA does not plan to phase in reductions fromcapital between 2014 and 2019 as the global rules allow.

These new global capital rules are not due to be fully inforce until 2019. The PRA is introducing some elements earlierbut it has not set out the exact timing of its plans.

A senior bank executive, who asked not to be named, said UKbanks were likely to need to hold core capital of 11-12 percent,based on his interpretation of the PRA's guidelines.

Hills, from the BBA, said: "Lots of commentators have saidwe may be looking at 10-12 percent core equity Tier 1 prettymuch as standard."

BACK TO THE DRAWING BOARD

The PRA proposals were released in August, and banks haduntil Oct. 2 to respond. The BBA's response said the proposalswould require banks to reconsider their capital plans.

Morgan Stanley analysts said Barclays could be mostaffected, even after it raised 5.8 billion pounds in a rightsissue last month to boost capital to meet another of theregulator's demands.

"This could lead to dividend restraint and slower revenuetrajectory at Barclays," they said in a note, adding Barclayscould also need to shrink the size of its investment bank.

British banks are already required to top up the globalminimum with a surcharge because they are among the biggest inthe world and also have a counter-cyclical buffer for bad times.

The PRA may also apply a buffer based on banks' individualstrength and wants them to hold more than half of theirso-called discretionary capital as top quality equity.

That could leave the core capital level for HSBC atabout 13.5 percent, and at 13 percent for Barclays, 12.5 percentat RBS and 11.5 percent at Lloyds, Morgan Stanley analystsestimated. That includes a 1 percent buffer they expectmanagement would want.

Under global rules, known as Basel III, the analystsestimated core capital at the end of this year would be 10-11percent for HSBC, Lloyds and Standard Chartered and 9.3percent at both Barclays and RBS.

The PRA consultation said firms that do not meet a combinedcapital buffer will be constrained in terms of paying dividendsor bonuses above a specified proportion of profits.

Lloyds is already considering whether it can restart itsdividend when it reports 2013 results in February. All the bankswill be finalising dividends and pay plans in the coming months.

The more stringent rules could force the banks to go back tothe drawing board on capital targets. HSBC has a core capitaltarget of 9.5-10.5 percent, Barclays it targeting 10.5 percent,and Lloyds and RBS are both targeting 10 percent or more, allunder full Basel rules.

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