Vince Cable Attacks Bank Capital Ruling

Banks Warned Over Capital Shortfall

Updated: 12:44pm UK, Wednesday 27 March 2013

Britain's banks have a capital shortfall of £25bn because they have under-estimated the potential losses and fines they face over the next three years.

The Bank of England's Financial Policy Committee (FPC) said regulators will order institutions to fill the capital hole by the end of the year - with further increases required in the future.

But the demand was met with criticism from Vince Cable, who told Sky's City Editor Mark Kleinman that boosting banks' balance sheets in this way would be counterproductive to economic recovery.

Bank governor, Sir Mervyn King, later argued that: "Far from reducing lending, today's recommendations will support lending and promote growth.

"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 FPC warned that over the next three years banks could suffer around £30bn in bad debts on exposure to property and eurozone economies.

They could also be hit by a further £10bn in so-called "conduct costs" such as mis-selling claims and around £12bn on a more prudent approach to risk.

"Taken together, the effect of these three adjustments would be equivalent to around a £50bn reduction in the regulatory capital of the major UK banks and building societies," the FPC said in a statement.

Shares in Lloyds and Royal Bank of Scotland rose after the announcement, as the shortfall figure was not as bad as feared in the City.

It comes after a warning in November that the capital hole needed as a cushion against future crises could be as high as £60bn.

Some of Britain's biggest banks have already taken action to boost their balance sheets after discussions with the Financial Services Authority.

But the FPC said that some lenders - which it did not name - still did not have the necessary capital to meet the requirements.

These banks and building societies will have to meet the gap by raising new capital or restructuring their balance sheets.

This must be done in a way that "does not hinder lending to the economy", the FPC stressed, with many small businesses across the UK already struggling to get loans.

RBS later said in a statement that its capital position was strong.

The Treasury also made it clear that the taxpayer will not stump up any more cash for taxpayer-backed lenders RBS and Lloyds.

Today's statement is seen as a pivotal one for the FPC, whose job it is to spot and prevent another financial crisis.

It is also the pillar of the new regulatory regime introduced by the coalition, which comes into force on April 1.

As part of the overhaul, the incoming Prudential Regulation Authority will ensure banks and building societies have capital ratios of at least 7%.

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