Bank of England policymakers have ordered UK banks to make a more "honest" assessment of hidden losses on their balance sheets and warned they will be forced to find ways to fill a shortfall that could be up to £60bn.
Sir Mervyn King, governor of the Bank of England, insisted that taxpayers would not be forced to plug any blackhole at the bailed-out banks.
Chancellor George Osborne had made it clear, he said, that the government would not add to the £65bn already ploughed into Royal Bank of Scotland and Lloyds Banking Group.
King called for banks to make an "honest and open statement" of what is lying on their balance sheets as the Bank's new financial policy committee (FPC) – set up to avoid a rerun of the 2008 banking crisis – called on the City watchdog to conduct a "proper valuation" of bank loans.
Andrew Bailey, the Financial Services Authority regulator who sits on the FPC, immediately began to contact bank bosses to begin the process which will eventually lead to banks publishing how much capital they need to raise and how they intend they do so.
They might choose to raise new cash, sell or close parts of their business or issue a new type of financial instrument known as contingent capital (Cocos).
There was a muted reaction in bank shares, as the remarks by the governor were interpreted as reducing the need for cash calls on investors, which shareholders had feared after previous quarterly meetings of the FPC.
The policymakers are concerned about three main areas: the way that banks are offering leniency to customers in arrears – a process known as forbearance; the scale of potential losses resulting from fines and compensation linked to mis-selling scandals such as payment protection insurance; and the way international capital rules allow them to set aside asset capital against the risk of the loans they hold.
The Financial Stability Report, published on Thursday,, estimated the total financial cost of those three factors at up to £15bn, £10bn and £35bn respectively – a grand total of £60bn.
However, the Bank governor stressed he was "not giving a single number" as this would be "misleading" and would depend on the circumstances of individual banks.
The bottom end of the estimates produces an estimated £24bn shortfall.
The UK's banks already have higher capital ratios than any of their rivals but the FPC is concerned about absolute amounts of capital. "We're not saying, tomorrow morning, be out there with the collecting tins," said King.
He added that while the subject needed to be addressed with urgency it was manageable for the banks.
Deputy governor Paul Tucker, who this week lost out in the race to succeed King next summer when Geroge Osborne appointed Canadian Mark Carney, said: "The watch word here is capital adequacy. There is no magic ratio.
Capital adequacy requires that banks have honest balance sheets and they shouldn't be constrained by accounting policies," said Tucker.
Current accounting rules do not allow banks to take provisions for estimates of future losses, only for losses that can be accurately forecast.
Tucker said banks need to set money aside on the basis of estimate of future losses. He gave a testy response when asked about his own future: "I'm the deputy governor of the Bank of England. There's a job of work to be done. I'm doing it."
King also closed down any attempts to ask Andy Haldane, another senior bank official, about his personal plans following the appointment of Carney, current governor of the Bank of Canada.
Another senior Bank official, Andy Haldane, admitted the FPC was "concerned" about the way banks are making provisions linked to the leniency they are offering to borrowers in the commercial property sector – which accounts to 50% of all business lending.
A survey by insolvency practioners R3 shows that more than one in 12 UK companies can only pay the interest on their debts and would not be able to keep up their repayments if interest rates were to rise. A third of all commercial property loans have received some sort of forbearance.
Some one in 12 mortgage customers are being helped with their repayments. The policymakers argue that one of reasons the share prices of the big banks are lower than their value of their assets – at the end of June the discrepancy was £90bn – is because investors are worried about potential bombs hidden on their balance sheets.
guardian.co.uk
Sir Mervyn King, governor of the Bank of England, insisted that taxpayers would not be forced to plug any blackhole at the bailed-out banks.
Chancellor George Osborne had made it clear, he said, that the government would not add to the £65bn already ploughed into Royal Bank of Scotland and Lloyds Banking Group.
King called for banks to make an "honest and open statement" of what is lying on their balance sheets as the Bank's new financial policy committee (FPC) – set up to avoid a rerun of the 2008 banking crisis – called on the City watchdog to conduct a "proper valuation" of bank loans.
Andrew Bailey, the Financial Services Authority regulator who sits on the FPC, immediately began to contact bank bosses to begin the process which will eventually lead to banks publishing how much capital they need to raise and how they intend they do so.
They might choose to raise new cash, sell or close parts of their business or issue a new type of financial instrument known as contingent capital (Cocos).
There was a muted reaction in bank shares, as the remarks by the governor were interpreted as reducing the need for cash calls on investors, which shareholders had feared after previous quarterly meetings of the FPC.
The policymakers are concerned about three main areas: the way that banks are offering leniency to customers in arrears – a process known as forbearance; the scale of potential losses resulting from fines and compensation linked to mis-selling scandals such as payment protection insurance; and the way international capital rules allow them to set aside asset capital against the risk of the loans they hold.
The Financial Stability Report, published on Thursday,, estimated the total financial cost of those three factors at up to £15bn, £10bn and £35bn respectively – a grand total of £60bn.
However, the Bank governor stressed he was "not giving a single number" as this would be "misleading" and would depend on the circumstances of individual banks.
The bottom end of the estimates produces an estimated £24bn shortfall.
The UK's banks already have higher capital ratios than any of their rivals but the FPC is concerned about absolute amounts of capital. "We're not saying, tomorrow morning, be out there with the collecting tins," said King.
He added that while the subject needed to be addressed with urgency it was manageable for the banks.
Deputy governor Paul Tucker, who this week lost out in the race to succeed King next summer when Geroge Osborne appointed Canadian Mark Carney, said: "The watch word here is capital adequacy. There is no magic ratio.
Capital adequacy requires that banks have honest balance sheets and they shouldn't be constrained by accounting policies," said Tucker.
Current accounting rules do not allow banks to take provisions for estimates of future losses, only for losses that can be accurately forecast.
Tucker said banks need to set money aside on the basis of estimate of future losses. He gave a testy response when asked about his own future: "I'm the deputy governor of the Bank of England. There's a job of work to be done. I'm doing it."
King also closed down any attempts to ask Andy Haldane, another senior bank official, about his personal plans following the appointment of Carney, current governor of the Bank of Canada.
Another senior Bank official, Andy Haldane, admitted the FPC was "concerned" about the way banks are making provisions linked to the leniency they are offering to borrowers in the commercial property sector – which accounts to 50% of all business lending.
A survey by insolvency practioners R3 shows that more than one in 12 UK companies can only pay the interest on their debts and would not be able to keep up their repayments if interest rates were to rise. A third of all commercial property loans have received some sort of forbearance.
Some one in 12 mortgage customers are being helped with their repayments. The policymakers argue that one of reasons the share prices of the big banks are lower than their value of their assets – at the end of June the discrepancy was £90bn – is because investors are worried about potential bombs hidden on their balance sheets.
guardian.co.uk
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