BofE warns UK banks could face £50-60bn black hole

Mervyn King Speaking 450

The Bank of England has warned that UK banks will need to raise as much as £60bn of new capital or face large restructures of their businesses.

The Bank of England’s Financial Policy Committee said it did not trust the way banks value their books and said they must report capital ratios which reflect a “proper valuation” of their assets and a “realistic assessment” of the cost of recent scandals, such as Libor manipulation and misselling of payment protection insurance.

According to the FT, BofE governor Mervyn King would not say the exact amount of capital needed, however estimates range from £20bn to £60bn

The BoE has instructed banking supervisors to begin working on the tougher approach immediately and banks could be expected to identify how they will meet any capital shortfall early next year.

In its Financial Stability Report, the Bank revealed that RBS, Lloyds, Barclays and HSBC – may need to take £15bn of extra provisions on consumer loans and European debt, between £4bn and £10bn to cover fines and customer compensation, and “between £5bn and £35bn” to meet regulatory risk standards.

The BofE said capital requirement differed from bank to bank.

King said: “It is important to keep this judgment in perspective. The problem is manageable and is already understood at least in part by markets. But it does warrant immediate action”.

King said the BofE does not expect banks to raise new equity and that any capital shortfall would probably be met through other means, such as raising contingent convertible debt or selling off assets.