U.K. Banks Must Meet Basel Rule Five Years Ahead of Schedule

The largest U.K. banks will have to comply with tougher capital rules five years ahead of an international timetable as the Bank of England seeks to bolster lenders’ resilience to crises.

U.K. banks and building societies including Barclays Plc, HSBC Holdings Plc and Royal Bank of Scotland Group Plc will have to meet capital requirements of the Basel Committee on Banking Supervision by Jan. 1, 2014, the Prudential Regulation Authority said in a statement today. The requirements include a debt limit, known as a leverage ratio, that forces lenders to have equity equal to 3 percent of their assets.

“These decisions will enhance the stability of the financial sector and strengthen the capital regime in the U.K.,” the regulator, a unit of the British central bank, said.

Lenders that will have to comply with the faster timetable also include Banco Santander SA’s U.K. unit, LLoyds Banking Group Plc, Co-operative Bank Plc, Nationwide Building Society, and Standard Chartered Plc, the PRA said.

The largest global banks cut the shortfall in the reserves they’ll need to meet Basel capital rules by 82.9 billion euros ($113 billion) in the second half of 2012, leaving a gap of 115 billion euros, according to Basel committee data published in September. The biggest lenders in Europe accounted for 70.4 billion euros of the remaining shortfall.

Close Loopholes

The requirements, known as Basel III, were published by international regulators in 2010 in a bid to close loopholes and remedy weaknesses exposed by the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008. The Basel measures are being implemented in the European Union through legislation, known as CRD IV, that was adopted earlier this year. The capital standards being applied in the U.K. are based on the CRD IV rulebook.

Barclays, the U.K.’s second-largest bank by assets, last month raised 5.8 billion pounds in a rights offering to meet stricter capital requirements. The London-based bank was one of only two British lenders to miss the regulator’s leverage target in June, with 2.5 percent. Nationwide, which at 2 percent also failed, was given until the end of 2015 to make up the shortfall.

Taking Advantage

Under CRD IV, national regulators can force their banks to implement the capital rules ahead of the international timetable. The rules, which are scheduled to be phased in by 2019, more than triple the core amount of capital, such as retained earnings and shareholder equity, that banks must have to absorb losses, to a minimum of 7 percent of risk-weighted assets.

The rules also limit what banks can count as capital and define how banks should calculate the riskiness of their investments.

While the Basel committee published its updated risk-weighted capital rules in 2010 and the EU adopted its implementing law this year, requirements for the leverage ratio are still under negotiation. The PRA said it will review its leverage rule in 2014 once international and EU-level talks are completed.

Before it's here, it's on the Bloomberg Terminal.