Barclays and Nationwide forced to strengthen

 
Barclays

The Bank of England's Prudential Regulation Authority (PRA) has moved the goalposts again in respect of how much capital banks need to hold to cover the risk of losses on loans and investments.

In the past week, it has told the big banks that it wants them to have equity equivalent to 3% of their gross loans and investments on a so-called stressed basis, or taking account of potential future losses.

The introduction of this tough new leverage ratio, announced this morning, may sound boringly technical but it matters - because it means that two big institutions, Nationwide and Barclays have to raise quite a lot more capital than they thought.

In the case of Barclays, and on a pro forma basis, the capital gap would be between £5bn and £7bn. But that does not mean Barclays would have to sell new shares to that value.

It can achieve the effect of meeting the new target by shrinking lending, and selling assets. And I understand the bank is hopeful that it can do what the PRA wants without too much strain.

I understand that both Barclays and Nationwide feel a bit miffed about being forced to hit this tough so-called leverage ratio at this juncture, because they are rare in that they have been supporting economic recovery by increasing their net lending.

Mervyn King Sir Mervyn King - his last hurrah?

They now feel they are being penalised for doing what the government wants.

So I would expect there to be something of a spat between government and regulators about all this.

There will now be a negotiation on how and when they will raise the necessary equity - but it will be easier for Barclays, with its stock market listing, than for Nationwide as a mutual building society.

As it happens, the decision to push through the new leverage ratio is very much in keeping with what the outgoing governor of the Bank of England Sir Mervyn King believes is the sine qua non of strengthening banks.

Some will see it as his last hurrah.

So it will be fascinating to see if his Canadian successor, Mark Carney, is more or less flexible on this.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 188.

    @187 Of course, the shortfalls for RBS and LBG are much larger than Barclays and Nationwide ((£3,200m and £7,000m), but no additional shareholder (inc. UK Government) funds are planned. That both RBS and LBG already comply with the 3% CET1 leverage requirement reflects the fact that adequate additional equity has already been provided by the UK Government's bail-out.

  • rate this
    +1

    Comment number 187.

    Yes, so it hits Barclays and Nationwide, 2 of the few non-government backed banking institutions still in existence. Makes you wonder who is providing the "core capital" to RBS, Natwest, Halifax, etc. etc. aha the taxpayer of course!!!

  • rate this
    0

    Comment number 186.

    @185 Barclays sees no need for a rights issue and Nationwide cannot have one. Of course, the reduction in the demand for borrowing means that there is little incentive to encourage deposits by higher interest rates. To (re-)build Tier One capital and reduce leverage, banks need a wider margin (more profit), so the downward pressure on borrowers' rates has an increased effect on depositors' rates.

  • rate this
    0

    Comment number 185.

    @148.Yes who indeed? I fear this has deteriorated into a rather esoteric debate on the technical niceties of the banking industry.IE what constitutes 'core capital' etc? Seems to me HMG has had a hand in all of this by putting up taxpayers money for lending, they've effectively provided a disincentive for bankers to offer decent interest rates to savers, & to some extent inflated property prices.

  • rate this
    0

    Comment number 184.

    @182 Officially, nobody knows whether 3% is "right". Under Basel III (153) "The Committee will test a minimum Tier 1 leverage ratio of 3% during the parallel run period from 1 January 2013 to 1 January 2017."

    www.bis.org/publ/bcbs189.pdf

 

Comments 5 of 188

 

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