BOE to Reveal U.K. Banks’ Capital Holes in Transparency Test

The Bank of England will reveal how much capital U.K. banks need in the first public test of its credibility and transparency since it took back the role of financial regulator.

The central bank will release details on capital needs for eight lenders including Lloyds Banking Group Plc, Barclays Plc, HSBC Holdings Plc and Royal Bank of Scotland Group Plc at 7 a.m. local time tomorrow, a person familiar with the report said.

The central bank, whose Prudential Regulation Authority unit took over as the U.K.’s banking supervisor from the Financial Services Authority, outlined potential losses for banks of 52 billion pounds ($81 billion) in March, demanding they raise 25 billion pounds of extra capital by the end of 2013 to strengthen their balance sheets.

The Bank of England is “clearly trying to be more transparent,” Bob Penn, a financial regulation lawyer at Allen & Overy LLP in London, said in a telephone interview. “The question is how much confidence the market will have in the numbers that get published.”

The BOE said in March that possible loan losses could exceed provisions by 30 billion pounds, while future fines and conduct-related penalties could be 10 billion pounds more than banks expect. It said lenders underestimated assets weighted for risk by 170 billion pounds, leading to a 12 billion-pound capital shortfall in that category.

Eight Banks

The PRA “will publish details on 20 June setting out the final conclusions of its capital exercise for all of the eight major UK banks and building societies,” the central bank said in an e-mailed statement on June 17. The lenders also include Standard Chartered Plc, Nationwide Building Society and Banco Santander SA’s U.K. unit, according to the person, who requested anonymity because the details haven’t been made public.

“We would expect that Lloyds and RBS would likely be most at risk here due to having the highest proportion of U.K. commercial real estate and Ireland exposures, but there could also be material deductions for Barclays if a cautious view was taken on Spain and Italy exposures,” a Morgan Stanley analyst team led by Huw Van Steenis said in a research note in March.

Capital Estimates

The Morgan Stanley report estimated that Lloyds needed 7 billion pounds, Royal Bank of Scotland Group Plc needed 9.8 billion pounds and that Barclays has a capital shortfall of 9.1 billion pounds under the central bank’s measures.

Lloyds and RBS said they could meet the requirements without needing to raise additional equity or sell contingent convertible securities, known as CoCos, which convert to equity automatically should capital levels deteriorate to a predetermined level.

The BOE will seek to avoid comparisons with European Union stress tests in 2010 and 2011, which were criticized for being too soft and for failing to reveal weaknesses in the 27-nation bloc’s banks.

In 2010, the now-defunct Committee of European Banking Supervisors said that seven EU banks needed only 3.5 billion euros ($4.7 billion) more capital, a 10th of the lowest analyst estimate. Nomura Holdings Inc. said European banks would need to raise 30 billion euros, while Barclays’s investment banking unit said they’d need as much as 85 billion euros.

‘World Changed?’

“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?’” Sam Woods, a director at the PRA’s domestic banking division, said in an interview in London on May 29. “The answer is absolutely yes.”

Barclays and HSBC have also ruled out share sales, according to two people familiar with their plans who asked not to be identified because they weren’t permitted to talk publicly. Standard Chartered Plc has said it already meets requirements.

The BOE has a “middle course to pick” between calming markets and appearing tough on banks’ capital positions, Penn said.

The BOE has already revealed that the Co-Operative Bank Plc needs to raise 1.5 billion pounds in common equity capital “in order to absorb potential losses over coming years,” according to a statement on the central bank’s website June 17. “We will hold the Co-Operative to the delivery of its plans.”

The lender, which has abandoned a bid to buy branches from Lloyds, said it will swap some debt for equity and trade on the London Stock Exchange to plug the capital hole. The Manchester, England-based lender’s credit rating was lowered four levels by Moody’s Investors Service yesterday.

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