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Banks giving 'misleading' details about bad debts and may have to set aside 35billion more, BoE warns
14:47 GMT, 29 November 2012
Britain's banks could be 'misleading' investors by failing to account properly for bad loans, including where they have given borrowers leeway on their debts, the Bank of England has warned.
The Bank of England urged lenders to take action to bolster their balance sheets and reveal the full extent of losses on bad debts, as well as expected compensation bills, in particular for mis-sold payment protection insurance (PPI).
The UK's four biggest banks – HSBC, Lloyds Banking Group, Barclays and Royal Bank of Scotland – could need to increase their capital reserves by as much as 35billion between them, according to the Bank.
Buffering: Banks may be underestimating potential losses from bad loans, the Bank of England warned.
The Bank used its Financial Stability
Report to warn that potential losses on some types of loans could be
greater than the cash buffer being set aside to cover defaults. It said
that provisions on loans to individuals where the bank had shown
'forbearance' – or leeway on repayments – were lower than on other types
It said the same applied to some loans to companies in the vulnerable euro countries, where UK banks were setting aside less than some local banks.
Mortgage and credit data through the financial crisis has shown that banks have provided a higher degree of leeway when borrowers have fallen into difficulty.
Bank Governor Sir Mervyn King said there were currently 'good reasons' to believe banks were not accurately reporting the level of capital buffers they hold.
'This uncertainty is responsible for low investor confidence,' he added.
Sir Mervyn said expected future losses were 'understated', banks had underestimated costs for customer compensation, and the assessment of risks faced by banks was 'optimistic'.
The Governor warned that together these factors were likely to have a 'material' impact on banks' capital buffers.
Concern: Sir Mervyn King said there were 'good reasons' to believe banks were not accurately reporting their capital buffers
He added: 'The danger to be avoided is inadequate capital holding back the recovery.'
Deputy governor Paul Tucker said the industry needs to reflect an accurate picture of financial health with 'honest balance sheets'.
The Financial Services Authority (FSA) is expected to start immediately asking banks to increase their capital buffers, which act as a cushion against shocks in the financial system and future crises.
But the Bank said it was vital this was done in a way that would not impact lending to businesses and households.
Sir Mervyn said there was a 'window of opportunity' for banks to build up capital reserves while they are able to use the 80billion Funding for Lending scheme, which offers cheap cash for lending on condition they pass it on to borrowers.
He said: 'The choice we face is to tackle the situation head on, which will be difficult and in some quarters unpopular, or to suffer a prolonged period of adjustment in which an inadequately capitalised banking system holds back recovery in the wider economy.'
'Our aim must be to get to a point where private investors again have confidence in banks and banks themselves have the confidence to lend,' he added.
Mr Tucker faced awkward questions after losing out on the top job to Canada's central bank boss Mark Carney, who was named as Sir Mervyn's successor earlier this week.
Amid speculation he will quit the Bank, Mr Tucker said: 'I'm deputy governor for financial stability – there's a job of work to be done. I'm doing it.'
While today's report makes for grim reading by the banks, it suggested some of the risks facing the economy had started to ease.
Sir Mervyn said the sentiment in financial markets had improved 'a little', although the Bank remained concerned by weak global economic conditions and the ongoing debt-crisis in Europe.
The report added there were signs of improvements in lending and lower rates for borrowers in the wake of the Funding for Lending scheme.