U.K. Banks Face $79 Billion Capital Boost In Future Basel Rules

The eight biggest U.K. banks by assets may need to boost their capital levels by 50 billion pounds ($79 billion) or shrink their balance sheets by 20 percent to meet tougher international rules in the future.

Regulators may require banks to meet a higher 5 percent leverage ratio, guidelines on transparency and tougher rules on how they weight assets for risk in the next round of capital regulations set by the Basel Committee on Banking Supervision, once the current standards are put in place by 2019, New York-based accounting firm KPMG LLP said in a report today.

“Even before Basel III is fully implemented, Basel IV may be emerging from the mist,” KPMG said in the report.

International banks have raised about $500 billion in capital in the aftermath of the financial crisis and fall of Lehman Brothers Holdings Inc. five years ago and are moving closer to complying with global capital rules known as Basel III, Mark Carney, chairman of the Financial Stability Board and governor of the Bank of England, said in a speech last week.

Global banks had core capital reserves averaging about 9 percent of their risk-weighted assets at the end of 2012, more than the 7 percent required under the updated standards, the Basel committee said in a report last month. The minimum ratio of equity to debt, known as the leverage ratio, is 3 percent.

An “overzealous pursuit of simplicity and overreliance on standardized risk-weightings” could encourage banks “to hold riskier assets,” KPMG said in the study.

’Relentless’ Lobbying

Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation, told Bloomberg Television yesterday that banks should be subject to a minimum leverage ratio of 8 percent. The level of bank lobbying of regulators on the leverage ratio has been “disheartening” and “relentless,” Bair said.

International standards set by the Basel committee require banks to meet minimum capital requirements, measured as a percentage of their assets. The amount of capital that must be held is linked to the riskiness of the assets, with large banks allowed to use their own models to calculate the likelihood of losses. This process is known as risk-weighting.

The Bank of England in June ordered the five largest U.K. lenders, including Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, to plug a 13.4 billion-pound capital shortfall by the end of the year.

The Basel committee brings together bank regulators from nations including the U.K., U.S. and China.

Source : bloomberg