British Banks May Escape Calls to Bolster Capital, UBS Says

British banks may escape calls from regulators to bolster capital as authorities are unlikely to find shortfalls in provisions for future losses, UBS AG (UBSN) said.

Risk-weightings -- the probability of default lenders assign to loans -- are difficult to “systematically manipulate” because regulations force banks to recalibrate their models to reflect actual losses, UBS analysts led by London-based Alastair Ryan wrote in a note to clients today. If U.K. banks used the strictest risk-weightings to set their capital needs, they would require about 17 billion pounds ($27 billion) of equity to maintain their ratios, they estimated.

Bank of England Governor Mervyn King last week asked the Financial Services Authority to review whether banks have adequate capital, saying lenders may need to make bigger provisions for future loan losses. Risk-weightings may also be inappropriate, he said, when presenting a report which said the capital ratios may be overstated by as much as 35 billion pounds by the country’s four biggest banks.

“We see limited risk of material challenges being discovered by the FSA in its review,” the UBS analysts wrote. Still, each bank may “have to offer up something” such as a payment of preferred dividends in equity, they said.

The Bank of England’s Financial Policy Committee said in the record of its Nov. 21 meeting, released yesterday, that the U.K.’s economic recovery depends on banks doing more to improve capital buffers and rebuild confidence in their balance sheets. UBS said that banks “are likely to step up lending,” led by mortgages, while “delivering strong” earnings-per-share growth in the next two years.

U.K. banks already have stronger Tier 1 capital ratios, a measure of financial strength, than lenders in the U.S., Spain, Italy, Germany and France, according to the note.

“With the banks now robustly positioned, we believe they will return to growing what are, at current funding costs, attractively profitable U.K. loans.”

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