Bank of England demands fresh increase in reserves as 25 European lenders are poised to fail financial stress tests
Banks and building societies will be ordered to beef up their safety buffers with billions of pounds of fresh capital to insulate them from potential losses on bad loans.
The new framework, expected to be outlined by the Bank’s Prudential Regulation Authority (PRA) on Friday — could restrict dividend payouts to investors. Depending on the severity of the rules, banks may also have to rein in lending to consumers and businesses, potentially hampering the economic recovery.
The PRA’s move coincides with a global push to raise capital cushions across the financial system. To strengthen their defences, banks have been cutting costs and raising cash from investors. A turbulent week for banks starts today.
The PRA is believed to be planning an increase in the amount of equity that lenders must hold against their loan books, known as the leverage ratio. The yardstick is controversial, as it measures total lending without taking into account the likelihood that borrowers will default.
The PRA sprang an unwelcome surprise last year when it set the leverage ratio at 3% — and told British lenders to reach the new standard five years ahead of banks in other developed economies. This forced Barclays into a £5.8bn rights issue, while Nationwide building society raised cash by selling bonds.
The regulator is expected to bump up the ratio to between 4% and 5%, but it may give lenders several more years to reach the higher level. It could also give extra leeway to the Nationwide, which is owned by its members and cannot raise capital on the stock market, unlike the big four banks — HSBC, Barclays, Lloyds and RBS.
Lenders are expected to stash away profits over the coming years to build up their capital reserves. This will leave them with less money to raise dividends.
Lloyds is expected to unveil a swingeing high street cost-cutting programme on Tuesday in response to the internet and mobile banking boom. Customers could in the future be advised about complex financial products by “virtual tellers” based in other locations, sources said.
The Sunday Telegraph