U.K. Banks May Need $36 Billion of Capital, Morgan Stanley Says

U.K. banks may be driven by regulators to hold as much as 22 billion pounds ($36 billion) of extra capital to guard against residential mortgage losses, according to Morgan Stanley analysts.

The Financial Policy Committee will likely require that banks increase the risk weightings they apply to residential mortgages, with Lloyds Banking Group Plc (LLOY) the most affected, the analysts including Chris Manners wrote in a report today.

“These potential measures cause uncertainty for all the U.K. domestic banks and challenge dividend assumptions,” Manners said. “If increased risk weights are implemented too quickly, this could choke off lending to the economy.”

The FPC is concerned that banks are allowed to assign different risk weights to mortgages based on their own internal models. The FPC recommended in March that Parliament give it powers of direction over capital buffers and requirements relating to areas such as residential mortgages and leverage ratios.

Banks may need to sell new shares to raise capital while they increase lending and remove bad loans and unwanted assets from their balance sheets, Andrew Bailey, head of prudential regulation at the U.K.’s Financial Services Authority, said in an opinion piece published in the Sunday Times on Sept. 30. The regulator has changed the guidance given to banks on capital needs over the past two months, Bailey wrote.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net