By Steve Slater
LONDON, Oct 18 (Reuters) - British banks may have to build up more capital and more quickly than they expected, forcing firms like Barclays to rein in dividends to shareholders and restrain bankers' bonuses to find the extra cash.
Britain's financial watchdog's plans, still under consultation, would require the banks to strengthen further their capital safety nets so taxpayers will not have to foot the bill if there is another crisis, bankers and analysts said.
Proposals being finalised by the Prudential Regulation Authority could result in banks having a capital safety net of nearly 12 percent of their risk-weighted assets, significantly higher than the 10 percent they had been working towards.
"Our analysis of (the) PRA consultation paper indicates UK banks may need to build to 12-13 percent core equity Tier 1 ratio vs current targets of about 10 percent, impacting growth and dividends," Chris Manners, analyst at Morgan Stanley, said.
The banks have already had to more than double the amount of capital they hold since the 2008 financial crisis to provide a bigger buffer against shocks in the future.
But Britain, which pumped 65 billion pounds ($105.22 billion) into Royal Bank of Scotland and Lloyds in the crisis, has said it will "gold-plate" new global capital rules to give extra protection for taxpayers and depositors given the size of the finance sector.
Britain's banks' balance sheet is more than four times the country's GDP, higher than most European countries and above the United States, where banks' assets roughly match GDP.
The banks are considered to be adequately capitalised by international standards, but now may need to build up more.
"The bar has been raised more quickly than we thought it would be," Simon Hills, executive director at the British Bankers' Association (BBA), said. He said banks' main concern was that the PRA does not plan to phase in reductions from capital between 2014 and 2019 as the global rules allow.
These new global capital rules are not due to be fully in force until 2019. The PRA is introducing some elements earlier but it has not set out the exact timing of its plans.
A senior bank executive, who asked not to be named, said UK banks 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 said we may be looking at 10-12 percent core equity Tier 1 pretty much as standard."
BACK TO THE DRAWING BOARD
The PRA proposals were released in August, and banks had until Oct. 2 to respond. The BBA's response said the proposals would require banks to reconsider their capital plans.
Morgan Stanley analysts said Barclays could be most affected, even after it raised 5.8 billion pounds in a rights issue last month to boost capital to meet another of the regulator's demands.
"This could lead to dividend restraint and slower revenue trajectory at Barclays," they said in a note, adding Barclays could also need to shrink the size of its investment bank.
British banks are already required to top up the global minimum with a surcharge because they are among the biggest in the world and also have a counter-cyclical buffer for bad times.
The PRA may also apply a buffer based on banks' individual strength and wants them to hold more than half of their so-called discretionary capital as top quality equity.
That could leave the core capital level for HSBC at about 13.5 percent, and at 13 percent for Barclays, 12.5 percent at RBS and 11.5 percent at Lloyds, Morgan Stanley analysts estimated. That includes a 1 percent buffer they expect management would want.
Under global rules, known as Basel III, the analysts estimated core capital at the end of this year would be 10-11 percent for HSBC, Lloyds and Standard Chartered and 9.3 percent at both Barclays and RBS.
The PRA consultation said firms that do not meet a combined capital buffer will be constrained in terms of paying dividends or bonuses above a specified proportion of profits.
Lloyds is already considering whether it can restart its dividend when it reports 2013 results in February. All the banks will be finalising dividends and pay plans in the coming months.
The more stringent rules could force the banks to go back to the drawing board on capital targets. HSBC has a core capital target of 9.5-10.5 percent, Barclays it targeting 10.5 percent, and Lloyds and RBS are both targeting 10 percent or more, all under full Basel rules.