LONDON (Reuters) - Britain’s banks must address persistent doubts among both investors and regulators about their capital adequacy ratios by tightening up the way they quantify risk, the Bank of England said.
The Bank of England’s Financial Policy Committee (FPC) said it will discuss at its next meeting in June whether banks should be forced to add up risks in two different ways, which could bump up costs.
Global and European regulators have found wide variations in how big banks quantify risks to determine their capital adequacy ratios.
“The Committee agreed that a line needed to be drawn under doubts about UK banks’ capital adequacy,” the FPC said in minutes of its March meeting published on Friday.
The committee discussed requiring banks to report risk-weighted assets using both their bespoke in-house models and the so-called standardised approach, which requires using ratings from outside credit rating agencies.
“This would provide greater transparency for investors and a platform for banks to communicate more clearly about the factors driving their risk weight calculations.”
The global Basel Committee of banking supervisors is looking at possible reform later this year and UK banking officials fear the FPC could “front run” what Basel recommends.
The FPC said it will evaluate in June if “further action was appropriate in the light of these related initiatives”.
Andrew Bailey, chief executive of Britain’s new banking supervisor, the Prudential Regulation Authority at the BoE, has criticised banks for “outrageous gaming” of risk weights.
UK banks already have to hold more capital to cover commercial property, irrespective of what models show.
Gary Greenwood, an analyst at Shore Capital, said the FPC was trying to give critics of in-house models comfort but there was no perfect way to calculate bank capital.
“It’s up to the regulators to sign off on internal models so they should not have agreed to them in the first place. It’s a bit of backtracking by regulators trying to point the blame elsewhere,” Greenwood said.
A greater reliance on the standardised approach would fly in the face of global efforts to scale back on banks’ heavy reliance on credit ratings after agencies gave high ratings to some assets which turned “toxic” in the financial crisis.
The FPC also said Britain’s banks needed to keep up a tight rein on paying bonuses and dividends as they build up capital.
Last week, the FPC told Britain’s banks they must raise 25 billion pounds of extra capital by the end of the year to absorb any future losses on loans.
But some FPC members worried that the extra capital banks were ordered to hold might not be enough and “were inclined to put in place additional upfront insurance,” the minutes said.
Recent stock market gains partly reflect “exceptionally” accommodative policies by many central banks and market sentiment “may be taking too rosy a view of the underlying stresses”, the FPC cautioned.
Additional reporting by William Schomberg; Editing by Sonya Hepinstall