20 June 2013

PRA completes capital shortfall exercise with major UK banks and building societies

The PRA has now concluded its work with the eight major UK banks and building societies in relation to the FPC's recommendation. The eight firms are: Barclays, Co-operative Bank, HSBC, Lloyds Banking Group, Nationwide, Royal Bank of Scotland, Santander UK and Standard Chartered.

At its March meeting, the interim Financial Policy Committee recommended that:

• “The PRA should assess current capital adequacy using the Basel III definition of equity capital but after: (i) making deductions from currently-stated capital to reflect an assessment of expected future losses and a realistic assessment of future costs of conduct redress; and (ii) adjusting for a more prudent calculation of risk weights".
• “The PRA should take steps to ensure that, by the end of 2013, major UK banks and building societies hold capital resources equivalent to at least 7 per cent of their risk weighted assets, as assessed on the basis described in Recommendation 1". 

The methodology used to calculate the capital shortfalls, originally published in March by the FSA, has been republished today. The document outlines the three adjustments that were made. For a more prudent valuation of assets, there was a specific focus on material vulnerable portfolios on firms’ balance sheets; and for conduct costs, the FSA (now FCA) provided analysis on the potential future costs that firms may incur. For the prudent calculation of risk weights, the primary focus was on the risk weights applied to corporate and institutional loans, and UK mortgages.  

The FPC also recommended that: 

• “The PRA should consider applying higher capital requirements to any major UK bank or building society with concentrated exposures to vulnerable assets, where there are uncertainties about assets not covered in the FSA's assessment of future expected losses or risk weights analysis, or where banks are highly leveraged relating to trading activities".
• “The PRA should ensure that major UK banks and building societies meet the requirements in Recommendations 2 and 3 by issuing new capital or restructuring balance sheets in a way that does not hinder lending to the economy. Any newly-issued capital, including contingent capital, would need to be clearly capable of absorbing losses in a going concern to enable firms to continue lending.” 

The PRA has asked firms to ensure that all plans to address shortfalls do not reduce lending to the real economy. In line with the FPC recommendation, the PRA has accepted restructuring actions which, by reducing risk-weighted assets, will credibly deliver improvements in capital adequacy.   

To complement this action, the PRA Board is also announcing its intention to require banks to deduct from Common Equity Tier 1 (CET1) significant investments in insurance companies above threshold allowances under its implementation of CRD IV/CRR. Where relevant, this treatment has been factored into the capital assessment outlined above.  

The PRA will hold firms to the plans they have agreed to deliver. The PRA will ensure firms’ capital positions accurately reflect the realities of their individual circumstances, including by using a regular process of stress testing. 

News release

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