Extra capital for UK banks. How not paying tax helps

You could call it Mervyn King’s leaving present. It is the day that Britain’s banks were forced to “pad up”.

We already knew that the financial policy committee of the Bank of England wanted Britain’s banks to hit effective capital ratios of 7 per cent. The brouhaha over Co-op has been about how they would do that.

This morning, at 7am, the Prudential Regulatory Authority released results as to what this would mean in practice: £27.1bn in extra capital for Britain’s banks.

Just over half of that, £13.6bn,  is for RBS alone, for Lloyds (basically the HBoS toxic legacy) it is £8.5bn, £3bn for Barclays, £1.5bn for the Coop, and £400m for Nationwide.

HSBC, Standard Chartered, and Santander UK are already there.

These numbers already contain existing announced plans to raise capital, Lloyds stands out as the bank required to raise the most at £7bn over and above existing plans versus £3.2bn for RBS.

Barclays says the funds will be raised “organically” with no need for a capital raising. Lloyds I will update you on. Co-op has bailed in some bondholders and will end up on the stock market.

RBS is rather intriguing. Of the £3.2bn, it says already planned action will reduce this to £0.4bn by the end of the year.

I will just focus on one note in its response:

“Note that deferred tax asset deduction is taken in full: with an impact of 70bps on CT1 (core tier 1). The real capital benefit of this asset for RBS will emerge for the next five years as the group returns to profitability”.

In English, this means that the horrific losses made by RBS over the past few years will be used as an asset on the balance sheet, a form of capital.

It is an asset because, under conventional accounting law, you can book these losses against future profits for the purposes of corporation tax.

To clarify further that means RBS will not pay corporation tax for years and years, at least five years according to this note. By my calculation, it has saved RBS around £4bn in capital (70 basis points of its 6.5% ratio, of £37.2bn).

Two issues arise:

•   How is a promise not to have to pay tax a tenth of RBS’ capital base?

•   How does everyone feel about RBS, whose losses were bailed out and underpinned by the taxpayer, then using those same losses not to pay tax for many years to come after it is nursed back to profitability?

Perhaps Labour might have a few answers. Surrendering the deferred tax asset was part of the original asset protection scheme bailout in 2009.

Over the course of the negotiation that clause disappeared for a reason I have not quite managed to put my finger on.

Credit to Stephen Hester for winning this concession, he was doing his job (and I had a minor debate with him about this calling it a “double bailout” in an interview last year).

But faced with other concerns about tax, justice, banking, and a fundamental review of RBS’s role, purpose and split, surely this should be in the mix.