Banks are accused of not being as strong as they claim and hiding 60bn black hole from investorsSir Mervyn King said the black hole was 'holding back our recovery'Bank of England blamed shortfall on hidden losses on loans, mis-selling scandals and 'misleading' accounting by country's biggest lendersIt ordered audit into banks' finances and called for lenders to raise funds
00:11 GMT, 30 November 2012
Sir Mervyn King said banks need to raise 60billion to protect against future losses
British banks are not as strong as they claim and could need to raise as much as 60billion of emergency funds to protect against future losses, the Bank of England warned yesterday.
Its governor, Sir Mervyn King, said the black hole at the heart of the banking system was ‘holding back our recovery’ and must be tackled ‘head on’.
The Bank blamed the shortfall on hidden losses on toxic loans, the mounting bill from mis-selling scandals, and ‘misleading’ accounting by the country’s biggest lenders – Royal Bank of Scotland, Lloyds Banking Group, Barclays and HSBC.
The cost of the payment protection insurance debacle – already 11.1billion – could almost double.
The damning assessment came in the half-yearly financial stability report by the Bank’s new financial policy committee, set up to monitor the health of the banking system.
It ordered an audit into the true state of banks’ finances and called for lenders to raise new funds or restructure their businesses where necessary to bolster confidence in the industry.
In a warning shot ahead of this year’s bonus round, the Bank said bankers’ pay should reflect this.
The report raised concerns that the Government could be forced to pump yet more funds into RBS and Lloyds, the part-nationalised lenders already propped up with 66billion of taxpayers’ money.
Sir Mervyn said the issue ‘does warrant immediate action’ – in the form of an investigation by the Financial Services Authority, the City watchdog – but added that it was ‘manageable’ and played down the prospect of another state bailout.
However, the report piled pressure on Britain’s troubled banks as they struggle to repair their battered balance sheets at the same time as lending to households and businesses.
Warning: The Bank of England (building pictured) blamed the shortfall on hidden losses on toxic loans
Sir Mervyn, who will be replaced by
Canadian Mark Carney at the end of next June, said sentiment in the
financial markets ‘has improved a little’ since the summer but added:
‘We continue to face an exceptionally challenging environment.’ The
governor said UK banks have reported ‘substantial’ cash buffers,
exceeding the minimum level required by regulators.
warned, however, that there were ‘good reasons’ to think the cash
buffers lenders claim to have ‘do not in fact provide an accurate
picture of banks’ health’.
report said banks could face another 15billion of losses on toxic
loans made to households in Britain and businesses in the crumbling
It also said banks have ‘underestimated and underprovisioned’ for the costs relating to scandals such as the mis-selling of PPI and the Libor interest rate rigging scandal. Although banks have already set aside 13billion – including 11.1billion for PPI – another 10billion could be needed as costs escalate.
The report by the Bank of England said that HSBC (pictured), Barclays, Lloyds and Barclays would need another 5billion to 35billion
The report added that –HSBC, Barclays, Lloyds and Barclays – would need another 5billion to 35billion because of ‘aggressive’ bookkeeping involving ‘complex and opaque’ techniques.
It said these factors meant banks’ ability to ‘cushion losses and maintain the supply of credit are not as great’ as implied.
Sir Mervyn said: ‘The choice we face is to tackle the situation head on, or to suffer a prolonged period of adjustment in which an inadequately capitalised banking system holds back recovery in the wider economy.’