Major British banks must reinforce their capital by STG25 billion ($A36.39 billion) by the end of 2013 after underestimating the potential losses and fines they face over the next three years, the Bank of England said on Wednesday.
The Bank of England (BoE) said some banks had sufficient capital to ensure they can meet potential future losses but others needed to raise the funds, although it did not identify them.
It was the first order from the BoE’s Financial Policy Committee (FPC), the new financial stability regulator, and followed a four-month study of the sector.
It said British banks and building societies, or lenders owned by their savers, faced losses of billions of pounds from “high-risk loan portfolios” in the British property sector and in “vulnerable” eurozone economies.
They also faced the possibility of STG10 billion of fines and therefore “a more prudent approach to risk” was required, meaning they need to build up their capital to levels set out by global banking guidelines.
“Some banks… have capital ratios in excess of 7.0 per cent; for those that do not, the aggregate capital shortfall at end of 2010 was around STG25 billion,” the FPC said.
The banks most affected are likely to be Royal Bank of Scotland (RBS) and Lloyds Banking Group, which are part-owned by the state after running up massive losses during the financial crisis.
Some observers said if RBS and Lloyds are required to raise more capital, it could delay plans to sell the banks back to the private sector.
However shares rose in both banks in early trading on Wednesday because the shortfall figure was not as bad as investors had feared.
Business Secretary Vince Cable criticised the move, saying it would prevent banks who are only just starting to lend to business again from doing so.
Cable said the order would “prolong the time it takes for the British economy to recover” because it would hit the “already-weak” lending to small and medium-sized companies.
Britain is not in recession but would technically enter one if the country’s economy is shown to have shrunk in the current first quarter.