Banks told to raise £25bn to protect themselves
Regulators say Britain’s banks must take action to ensure they can cope with the extra costs they face because of bad debts, mis-selling and the eurozone crisis.
The Bank of England’s financial policy committee (FPC) says banks and building societies need to raise £25bn by the end of 2013 to deal with a potential £50bn hit over the next three years.
Of this £50bn, £30bn is the likely result of bad debts from property and eurozone lending and £10bn is the future cost of mis-selling.
There had been speculation that the FPC could tell financial institutions to raise as much as £60bn, so the £25bn figure will come as a relief to them. But some institutions will find it easier to meet the new requirements than others.
Lending
There are concerns that the economy is suffering because banks are not lending as much as they should to small businesses.
One question being asked is whether they will be more reluctant to lend if they have to raise more money to protect themselves.
The FPC said this fundraising should be carried out in a way that “does not hinder lending to the economy”.
Bank of England Governor Sir Mervyn King said the FPC’s requirements would boost lending.
He said: “A weak banking system does not expand lending. The better capitalised banks are the ones expanding lending, and it is the weaker capitalised banks that are contracting lending.”
The banking sector disputes claims that it is failing to lend to small businesses, saying that it approves eight out of 10 loans.
It believes many businesses are wary of seeking a loan because they are under the wrong impression that they will be turned down, and says the Bank of England has made it clear that banks are expected to support small firms and this will continue, despite the capital requirements.
But Richard Barfield, banking director at the accountants PWC, said it was not clear if investors would be willing to plough money into the banks.
‘Key challenge’
He added: “Without external capital-raising, the principal way for banks to achieve more demanding capital ratios would be to reduce lending or carry out more de-leveraging, which is not conducive to economic growth.
“Striking the right balance between financial stability and sustainable economic growth continues to be the key challenge for policy-makers and politicians.”
The FPC has not disclosed which banks have to boost their capital reserves, but some lenders have already started taking action.
The Co-operative Bank, reportedly facing a £1bn shortfall, recently announced the sale of its life insurance and asset management arm to Royal London and will also offload its general insurance business.
The British Bankers’ Association said institutions were “already working closely with the regulators” on funding arrangements that would support growth and guard against future shocks.