UK

Banks Told To Raise Capital By Financial Policy Committee To Cushion Against A Crisis

27/03/2013 07:04 GMT | Updated 26/05/2013 10:12 BST

Britain's banks are to be told they must raise tens of billions of pounds to strengthen themselves and cushion against potential losses in the future.

As the Bank of England delivers its verdict on the strength of the sector, the bank's Financial Policy Committee (FPC) will reveal the scale of the balance sheet pressure in the banking industry and its decision on how to tackle the collective capital hole.

Lenders - such as The Co-operative Bank - have already been taking action to boost their balance sheets after discussions with the Financial Services Authority (FSA).

But it is thought the FPC believes banks will have to go further and raise more than the £60bn agreed with the FSA, which is set to be axed on Monday as part of a major regulation overhaul in the UK.

In its quarterly report on liabilities and financing in the sector, the Bank yesterday said that capital levels remained broadly unchanged so far this year, although they were expected to rise in the next three months.

It had expected capital levels to have already started increasing.

A number of players are understood to have been given orders by the FSA to beef up their capital cushions, with the Co-operative Bank reportedly warned over a potential £1 billion shortfall.

The Co-op is taking steps to improve its capital position ahead of the planned purchase of more than 630 Lloyds branches, recently announcing the sale of its life insurance and asset management arm to Royal London and offloading its general insurance business.

There are fears that state-backed lenders Royal Bank of Scotland and Lloyds Banking Group are also significantly under-capitalised and may be told to bolster their balance sheets with large capital raisings.

The Treasury is expected to make it clear that the taxpayer will not foot the bill and that there will be no more direct state support for RBS and Lloyds.

Instead, the FPC is likely to allow the lenders an extended period to come up with measures to build up their capital buffers.

They have already started making efforts to appease concerned regulators, with RBS recently agreeing to float a stake in its US business Citizens, while Lloyds has raised £500 million by selling part of its stake in fund manager St James's Place.

Wednesday'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.

First set up on an interim basis last year, the FPC is chaired by the Bank governor and will sit alongside the Prudential Regulation Authority and the Financial Conduct Authority.

It will take the broadest overview of financial regulation in the UK and comprises a mixture of Bank of England staff and external experts.

Think tank Policy Exchange raised concerns that measures imposed on the sector by the FPC would further restrict their ability to lend to small businesses.

James Barty, head of financial policy at Policy Exchange, said: "Bank lending to private companies in the UK has fallen by £10 billion in every single year since the financial crisis.

"Increasing capital ratios even further, as the FPC is considering, would lead to a further lack of credit to small businesses.

He added: "We need more flexibility in the regulatory system so that banks capital can support their lending not just make sure they don't go bust in a crisis."

Ahead of the April 1 regulation overhaul, the Treasury confirmed the four external members of the FPC as Dame Clara Furse, ex-chief executive of the London Stock Exchange, Donald Kohn, former vice-chairman of the Federal Reserve, former Goldman Sachs banker Richard Sharp and Martin Taylor, who was a member of the Independent Commission on Banking.

Bank governor Sir Mervyn King said: "With their combined experience and expertise, I am sure that they will make a major contribution to the work of the FPC."