LONDON Britain's banks will have to raise 13 billion pounds of extra capital and meet new a new cap on lending ahead of international peers as the Bank of England seeks to curb risk in the financial sector.
The combined balance sheet of Britain's largest banks is five times the size of the economy, despite radical restructuring since the crash in 2008, and the country's central bank fears many are still too big to fail.
Yet privately, some bankers are already complaining that higher capital requirements and limits on leverage are hampering their ability to lend in support of government efforts to boost the fragile domestic economy.
The Prudential Regulation Authority PRA.L, the Bank of England's new banking regulator, said on Thursday there was an aggregate capital shortfall of 27 billion pounds at the end of last year at Royal Bank of Scotland (RBS.L) (RBS.L), Lloyds Banking Group (LLOY.L), Barclays (BARC.L), Co-operative Bank CPBB_p.L and Nationwide Building Society.
The five have already outlined plans to bring the gap down by 13.7 billion pounds and the rest will be raised via disposals and restructurings.
Part-nationalised RBS accounted for just over half of the shortfall, some 13.6 billion pounds, underscoring the challenge facing Prime Minister David Cameron as he seeks to sell down the state's 81 percent stake in the bank.
The government admitted late on Wednesday that a sale of its stake in RBS was a long way off and said it would review the possibility of splitting RBS, putting its toxic property loans into a so-called "bad bank". Chancellor George Osborne said such a break-up should have happened five years ago.
Many people, including Osborne, have said previously that creating a bad bank for RBS would be too costly and one top-10 RBS investor warned it could damage the wider economy.
"RBS's record on new lending in the UK mortgage market is already very strong. It is possible that the capital strain of a split could produce the reverse effect from that intended, that is it could actually cause less lending to the UK economy," said the investor.
ABILITY TO LEND
The Bank of England also wants banks to meet tougher new global capital rules well before an international deadline of 2019. And it set a "leverage ratio" of 3 percent for UK banks with immediate effect, four and a half years before it is due to be implemented globally, effectively limiting their ability to lend.
The leverage ratio measures capital against total loans, not adjusted for their supposed riskiness, and some bankers argue it penalises low-risk, high-volume businesses like trade finance and mortgage lending, crucial to economic growth.
The PRA said Barclays and Nationwide fell short of the required level with leverage ratios of 2.5 percent and 2 percent, respectively, after adjustments. It said they must submit plans by the end of this month to reduce leverage.
Barclays and Nationwide were the only firms whose net UK lending was more than 1 billion pounds in the first quarter.
A parliamentary commission on the banking sector, set up by Osborne last year, had recommended a ratio of 4.06 percent.
Barclays said its restructuring plans include a reduction in leverage "over time" and it would keep the market updated as required.
In its calculation of their capital requirements, the PRA recommended that Lloyds, 39 percent owned by the state, retains some 12 billion pounds to cover potential future losses arising from previous misconduct such as mis-selling products, the largest of the all the main UK banks.
Osborne said late on Wednesday that the government was ready to start selling its shares in Lloyds.
Lloyds has already announced plans to raise 5.8 billion pounds in capital and on Thursday said it expects to meet its additional 2.8 billion requirement without needing to issue hybrid debt or shares.
(Additional reporting by Steve Slater, Laura Noonan and Sinead Cruise; Writing by Carmel Crimmins; Editing by David Holmes)