UK’s four biggest banks £155bn short of safety
By Ben Chu
The UK’s four biggest banks would need to raise another £155bn in
fresh capital to withstand a new financial crisis, despite the view of
the Bank of England Governor that lenders have an adequate cushion to
cope with further turmoil.
Those are the results of research from three respected financial
academics – and add to a growing feeling that the Bank of England is
dangerously undercooking its capital requirements on UK lenders in the
face of swelling instability in financial markets.
Cost
UK banks had to be rescued in 2008 and 2009 at massive cost to
British taxpayers.
Capital represents the shareholder funds in banks available to absorb
losses. When losses are greater than the capital cushion the bank is
bust and may need to tap state support if deemed to be systemically
important by politicians and regulators.
In a new paper Viral Acharya of New York University, Diane Pierret of
the University of Lausanne and Sascha Steffen of the University of
Mannheim calculate that HSBC, Barclays, Lloyds and the Royal Bank of
Scotland would need to raise $185bn (£155bn) of new equity between them
to retain a 5.5 per cent capital cushion in a crisis, which is the
benchmark of safety used in the past by the European Banking Authority.
That sum is not far away from the present market capitalisation of these
banks, implying that they are massively overexposed.
The EBA’s stress test exercise last Friday showed the UK’s major
lenders would see their capital diminished in another European economic
crisis, but not below the 5.5 per cent level of so-called “risk-weighted
assets” that would have created pressure for more equity injections.
The Bank of England’s Governor, Mark Carney, has made his
unwillingness to require banks to raise more capital clear in recent
months.
Requirements
He wrote a letter to the Group of 20 finance ministers last month
saying “authorities are committed to not significantly increasing
overall capital requirements across the banking sector”.
This stance has drawn criticism from a number of independent
financial experts and also Sir John Vickers, who chaired the
Government’s Independent Banking Commission in 2011. In May, Sir John
said that the Bank had adopted a “soft policy” on bank capital and
stressed that his 2011 report, whose conclusions were accepted by
Parliament, said that major lenders should have to fund their balance
sheets with considerably more.
And in response to the latest academic calculations indicating a
£155bn capital shortfall Sir John said: “The weakness of bank share
prices is a further indication that policymakers have been sailing too
close to the wind on bank capital.”
Robert Jenkins, a senior fellow at Better Markets and a former member
of the Bank’s own Financial Policy Committee, said: “The balance sheets
of these banks represent a multiple of UK GDP.
That the adequacy of their loss absorbing capital is so hotly
contested 8 years on from [the collapse of Lehman Brothers] shows the
failure of financial reform.” That view was echoed by Prof Kevin Dowd of
Durham University earlier this week, who lambasted the Bank’s “stress
test” regime for banks for “portraying a weak banking system as strong”.
The Bank of England declined to comment on the Acharya, Pierret,
Steffen paper’s findings but pointed to its response to the EBA stress
test last week which said “major UK banks have the resilience necessary
to maintain lending to the real economy, even in a macroeconomic stress
scenario”.
The Bank is in the process of conducting its own new stress test on
UK lenders, which is due to be published in the final quarter of this
year.
Acharya, Pierret and Steffen argue that the broader European banking
sector could be undercapitalised to the tune of around €890bn – a figure
they calculated using stock market valuations of banks’ equity rather
than the sums reported by lenders themselves. Bank share prices have
continued to fall since last Friday’s EBA stress test, implying
investors are far from reassured by the fact that most lenders received
a clean bill of health from the regulators.
The shares of the UK’s major lenders are still trading well below the
“book value” of their assets.
Lloyds is at 78 per cent of book value on a trailing 12 month basis,
HSBC is at 70 per cent, and Barclays is at just 40 per cent. The price
to book value of RBS (which is still 72 per cent owned by the UK
government) is 42 per cent.
This implies that market think banks are overstating the real value
of their assets or that their future capacity to earn profits in future
is impaired - or both.
However, in a reflection of the Bank of England’s thinking on this,
in speech in March the Bank’s executive director for financial
stability, Alex Brazier, noted that despite the low price to book ratio
of the UK’s banks, their ability to borrow in financial markets was
unimpaired.
- The Independent
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