BoE demands 'honesty' from banks over empty coffers

A Bank of England committee has discovered a £25bn capital shortfall in UK banks after investigating losses hidden deep in their P&L accounts.

by Rebecca Burn-Callander

Major UK banks must raise a total of £25bn in extra capital by the end of 2013 to make sure that the cash buffers are sturdy enough to prevent another banking crisis, the Bank of England reveals today. And more money may be required at the end of the year to keep those buffers secure.

The BoE's Financial Policy Committee (FPC) was set up as a kind of banking watchdog to investigate the amount of risk on UK banks' balance sheets (and prevent another financial meltdown). In its first statement since investigations began in November, the FPC has confirmed that only some banks have fallen short of their capital requirements (need to sit in the naughty corner) while others have already raised the required cash. No names have been named to protect the guilty, of course.

Before today, the capital shortfall in UK banking was estimated to be up to £60bn or as 'little' as £24bn. The FPC now confirms that losses are likely to hit the £50bn mark over the next three years, relating to bad loans and fines.

The order is the first issued by the FPC since it formally gained powers last year. Bank of England governor Sir Mervyn King set the FPC sniffers on the banks' balance sheets after it emerged that some were failing to make 'honest' assessments of the amount of capital they hold.

So, what does this £25bn shortfall mean for consumers and businesses? In the short term, the need to raise cash will be bad news for investors, including UK taxpayers who still own massive stakes in two major banks. If the banks are stockpiling cash, they're not paying it out to shareholders. And it will likely make the prospect of sales of the taxpayers' stakes in both RBS and Lloyds an even more distant prospect than they are already...

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