The Prudential Regulation Authority or PRA has found that five British banks together have a capital shortfall of 27.1 billion pounds. These banks include Barclays Plc. (BCS, BARC.L), Royal Bank of Scotland Group Plc (RBS, RBS.L), Lloyds Banking Group Plc. (LLOY.L, LYG), Nationwide and Co-operative Bank.
RBS has a shortfall of 13.6 billion pounds and Lloyds 8.6 billion pounds, while the requirement for Barclays is 3 billion pounds. Co-operative Bank needs 1.5 billion pounds and Nationwide has a deficit of 0.4 billion pounds.
HSBC, Santander UK and Standard Chartered were found financially healthy by the regulator.
Under the Financial Services and Markets Act, the PRA is responsible for the regulation of banks, insurance companies, certain investment banks, credit unions and friendly societies for purposes of safety and soundness.
The interim Financial Policy Committee had asked the PRA to assess current capital adequacy and take steps to ensure that, by the end of 2013, major UK banks and building societies hold capital resources equivalent to at least 7 percent of their risk weighted assets.
The PRA said that three adjustments were made. For a more prudent valuation of assets, there was a specific focus on material vulnerable portfolios on the balance sheets of firms. For conduct costs, the FSA provided analysis on potential future costs that firms may incur. For the calculation of risk weights, the primary focus was on the risk weights applied to corporate and institutional loans as well as UK mortgages.
According to the PRA, after these adjustments were made, each firm should target a risk-weighted capital ratio based on the Basel III definition of at least 7 percent.
The regulator noted that the five banks were found to have a shortfall in March, at which time the gap was a total of 25 billion pounds. At that time, the five firms had in place plans to take actions that were estimated to generate around 12.5 billion pounds of capital during 2013.
The final figure for these actions is 13.7 billion pounds, and many of these intended actions require regulatory approval. The PRA said such actions cannot be assumed to have contributed to meeting the requirement until approval is obtained.
After these planned actions, the PRA assesses that four of the five firms will have a shortfall against the 7 percent standard. These firms are required to submit plans for further actions to plug the 13.4 billion pounds shortfall.
For most firms, meeting the recommended 7 percent risk-weighted capital standard after adjustments will be sufficient for their leverage ratio to be no less than 3 percent, after adjustments.
The PRA has asked firms to ensure that plans to address shortfalls do not reduce lending to the real economy.
The PRA said that majority of actions are due to be completed by the end of 2013, but it has allowed some flexibility for certain actions to be delivered during the first half of 2014.
Meanwhile, responding to the report, RBS said it expects to continue to improve its Core Tier 1 capital ratio during 2013 through continued delivery against its established business plan.
RBS continues to target a 'fully loaded' Basel 3 CT1 ratio of around 9 percent by the end of 2013, after including the provision of capital to fund anticipated future loan growth.
Separately, Lloyds said it expects to report an estimated pro-forma fully loaded CRD IV core tier 1 ratio of above 9 per cent by the end of this month, six months ahead of its previous guidance, and approximately 10 percent by the end of 2013, which is a year ahead of guidance.
Lloyds added, ''...the Group is confident in its capital position and expects to meet the Prudential Regulation Authority's (PRA) requirement, announced today as £8.6 billion of additional capital out of £27.1 billion for the UK sector, without recourse to further equity issuance or the utilisation of additional contingent capital securities.''
Barclays said it is confident that it will exceed the 7 percent PRA-calculated ratio organically by the end of 2013 through capital generative businesses and progress in executing its Transform program, including disposals of legacy assets.
BARC.L is currently down 3 percent at 292.60 pence.
RBS.L is falling 1.4 percent at 315.00 pence.
LLOY.L is losing around 0.5 percent at 61.48 pence.
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