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U.K. Banks to Be Told Share of $38 Billion Gap by Next Month

The Prudential Regulation Authority, the unit of the Bank of England which took over responsibility for banking supervision from the Financial Services Authority last month, along with the Financial Policy Committee, ordered lenders to boost their capital by the end of the year. Photographer: Simon Dawson/Bloomberg
The Prudential Regulation Authority, the unit of the Bank of England which took over responsibility for banking supervision from the Financial Services Authority last month, along with the Financial Policy Committee, ordered lenders to boost their capital by the end of the year. Photographer: Simon Dawson/Bloomberg

May 29 (Bloomberg) -- The U.K.’s Prudential Regulation Authority is aiming to tell all lenders their individual share of a 25 billion-pound ($38 billion) capital shortfall by the end of June, according to a senior bank supervisor.

The watchdog has a “timely but not rushed process” to discuss with each firm in turn the steps they need to take to bolster their balance sheets, Sam Woods, a director at the PRA’s domestic banking division, said in an interview in London.

“We’re quite a way through that process but we’re still in it,” said Woods, who oversees U.K. banks including Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc. “My expectation is we’ll basically be through by the end of June.”

The PRA, the unit of the Bank of England which took over responsibility for banking supervision from the Financial Services Authority last month, along with the Financial Policy Committee, ordered lenders to boost their capital by the end of the year. Lloyds and RBS said this month they could meet the requirements without needing to raise additional equity or sell contingent convertible securities, known as CoCos.

“Some people were asking, ’have you really made them do anything? Has the world changed as a result, because the banks so far haven’t had to raise equity?’ The answer is absolutely yes,” said Woods.

The British banking system “will be significantly better capitalized by the end of this year than it would have been without” the FPC exercise, said Woods, who was formerly a senior manager at U.K. Financial Investments Ltd., the company set up during the 2008 financial crisis to manage the government’s investments in Lloyds and RBS. “I’m absolutely convinced of that.”

Selling Units

Britain’s lenders have been selling units and detailing plans to bolster their businesses since the central bank initially said in November it was concerned that they weren’t holding enough capital.

Since then, Lloyds has sold a 35 percent stake in wealth-manager St. James’s Place Plc and is considering a sale of its Scottish Widows Investment Partnership division. Edinburgh-based RBS said in February it would sell a 25 percent stake in Citizens Financial Group Inc., the U.S. consumer and commercial lender, and would further shrink its investment bank.

Lloyds shares have advanced 27 percent this year. RBS shares, which are up 1 percent in 2013, remain below the 407 pence break even rate on the government’s 45.5 billion-pound investment.

Bank Sale

The U.K. owns 39 percent of London-based Lloyds and 81 percent of Edinburgh-based RBS after the previous Labour government injected 65.8 billion pounds into the two lenders during the financial crisis.

The decision to start selling the public stake in the banks “is clearly a government decision, through UKFI,” Woods said.

“In terms of our objectives of safety and soundness, it would definitely be a good thing to get these banks back out of government ownership as part of normalizing the financial sector,” Woods said. “So we would like to see that happen, but it’s a government decision.”

Chancellor of the Exchequer George Osborne is seeking to reduce the taxpayers’ stake in the two banks before a general election due in 2015. Constrained by the toughest austerity program since World War II, he could use the proceeds of a sale to fund tax cuts or more spending before the vote.

Earlier this year, the Treasury reduced the price below which it would recognize a loss from selling its stakes in Lloyds and RBS to take into account fees the lenders paid the government, officials with knowledge of the matter said in March.

To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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