Barclays, RBS, Lloyds , HSBC Forewarned by Bank of England.

[ by Melanie Gretchen and Howard Haykin ]

Fallout from the Euro Zone crisis, Libor litigation and other issues are likely to take their toll on banks, according to The Bank of England.   This prompted a warning from the BOE to Britain's 4 largest banks, as well as to the international community, advising them that they'd be better served by increasing their capital levels.  

These findings are based on BOE's latest report on financial stability, which also opined that major U.K. bank capital balances probably are overstated because they do not account for possible future losses, higher than expected vulnerability to costs of bad loans or other past business decisions.

"We need to ensure that reported capital ratios do in fact provide an accurate picture of banks’ health.  At present there are good reasons to think that they do not." -- Mervyn A. King, governor of the bank, in a press briefing as he presented the report.

Root of the Problem.  Citing the capital ratios of Barclays, RBS, Lloyds, and HSBC, the BOE noted noted that these banks' capital balances could be overstated by as much as £5 billion to £35 billion (equivalent to $8 billion to $56 billion).  Yet, this should not be taken as "new news," according to Mr. King, who repeatedly has commented that bank capital cushions are too thin.  To remedy this situation, he suggested that banks cut bonuses and use the money to expand capital buffers.  Mr. King added that taxpayers would not bear the burden of banks' capital expansion.  Instead, the Treasury and the BOE will continue providing cheaper funding for banks if they commit to increase lending.

Raising Capital.   While issuing the message that banks should be more transparent in disclosing their credit buffers and should look more prudently at inherent risks, Mr. King noted that BOE's findings do not imply that banks have been dishonest in booking provisions or in accounting for future possible losses.  Rather, the problems is with reporting standards did do require banks to be more vigilant.  So while, banks have been compliant, many banks have been unwilling to be more prudent about possible future losses.

King expressed this final point:  That additional capital would improve global growth and protect against "significant adjustments" on debt in the euro zone.  It's also essential that banks act to regain investor confidence, which would have the effect of making it easier and cheaper for them to raise money in the financial markets.

For further details, go to [Dealbook, 11/29/12].