Will UK Banks Stay Afloat?

Banks in the United Kingdom have a ways to go to meet the capital requirements set bythe new Basel III rules, but analysts believe the banks can have the money soon enough.

The Bank of England formed the Financial Policy Committee, which said that the UK’s big banks needed to increase their capital buffers to weather the weak domestic economy and euro-zone crisis. In total, the FPC determined that UK banks need an aggregate of 25 billion British Pounds (or about $38 million) to create a decent buffer.

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Analysts were not surprised by the figure, and Governor Mervyn King of the FPC said there wasn’t “an immediate threat to the banking system” from the shortfall on capital and that “the problem is perfectly manageable.”

Royal Bank of Scotland (NYSE:RBS) and Lloyds Banking Group (NYSE:LYG)are two key banks that currently lack the necessary capital, and analysts have said they have the biggest need for the additional capital. They both reported net losses in 2012, though analysts believe they should be able to scrounge up 5 billion pounds by selling assets and exiting businesses — which Lloyds did when it sold 20 percent of its stake in St James’s Place for 600 million pounds. Combined with Barclays (NYSE:BCS), the banks are expected to pull in a net profit of 8 billion pounds for the year…

Having strong capital reserve is seen as important for minimizing the dangers that risk-weighted assets, loan losses, and fines pose for the banks. It’s also believed that the banks with lower capital reserves are less willing to lend and are contributing to the lending contraction that’s been going on since 2008, which politicians site as a cause for the UK’s economic weakness.

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The banks may be able to sell new shares in order to raise the money needed to meet the 7 percent requirement, and it’s possible they could issue contingent capital bonds that can be applied to equity, though those don’t meet Basel III definitions of equity, the rules may be softened to allow it. All together, analysts and the FPC seem confident that banks will not have a problem raising the funds needed to protect themselves and the economy.

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