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LONDON (Reuters) - Barclays (BARC.L) is nearing an agreement that would give it until the end of next year to improve its capital position, according to a person familiar with the matter, an outcome that may reduce the need to raise equity.
The Bank of England's Prudential Regulation Authority (PRA) said last month that Barclays and Nationwide fell short of a 3 percent leverage ratio, the measure of their equity to assets, after including potential losses and charges.
The PRA said Barclays had a ratio of 2.5 percent under its criteria and needed to get to 3 percent by the end of this year. Barclays said it would hit the target by the end of 2015 and warned a more immediate deadline could force it to cut lending. The PRA said that was not an option.
Advocates of higher leverage ratios say they would have allowed banks to weather the kind of market turbulence that forced many to request costly government bailouts during the financial crisis.
The Financial Times said on Thursday that Barclays and the regulator were close to agreeing on an end-2014 deadline to hit the 3 percent target.
Sources familiar with the situation told Reuters a deal had not been finalised, but one said reaching the target by the end of next year was a likely outcome. Lender Nationwide has until the end of 2015 to meet the target but, as a mutually owned firm, has fewer options to improve quickly and is less systemically important than Barclays.
A Bank of England spokesman said it would not give "a running commentary" on the negotiation process, and Barclays declined to comment.
Analysts said Barclays should be able to reach the 3 percent goal by 2014 without needing to raise equity.
Andrew Lim, analyst at Espirito Santo, said Barclays was likely to generate 4.1 billion pounds of capital this year to improve the leverage ratio used by the PRA to 2.8 percent and leave it with a 3.2 billion pound capital shortfall, or needing to get rid of 107 billion pounds, or 7.5 percent, of its assets.
"Extending the deadline by a year (to end-2014) would be welcome and we believe that Barclays would readily be able to reduce the balance sheet by about 7.5 percent without having much impact on profitability. This also means that the risk of a capital raising to meet the leverage ratio has receded," Lim said.
Barclays shares were down 0.6 percent at 318.5 pence by 1020 GMT, in line with a weak European bank sector index .SX7P.
UK, U.S. and Swiss regulators have stepped up pressure on banks to improve leverage ratios, stoking debate on how to strengthen lenders without stifling economic recovery.
Ian Gordon, an analyst at Investec, said Barclays' existing capital plan already provided for significant balance sheet deleveraging and it should be able to comply by the end of 2014 by reducing surplus liquid assets, reverse repos and legacy assets.
An agreement is expected by the time Barclays releases its quarterly results on July 30. The PRA has said it planned to resolve the issue by Wednesday at the latest.
Reporting by Steve Slater; additional reporting by Huw Jones; editing by Tom Pfeiffer