Banks must plug £25bn capital gap

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BRITAIN’S banks must plug a £25 billion capital shortfall as they face a potential £50 billion hit over the next three years from eurozone shocks, bad debts and mis-selling scandals, the Bank of England warned today.

The Bank’s financial policy committee (FPC) said regulators will order banks to fill the capital hole by the end of the year to withstand the expected strains on their balance sheets.

It warned that over the next three years banks could suffer around £30 billion in bad debts on exposure to property and eurozone economies, another £10 billion in conduct costs such as mis-selling claims and around £12 billion on a more prudent approach to risk.

Shares in Lloyds and Royal Bank of Scotland rose today as the shortfall figure was not as bad as feared in the City.

Banks and building societies will need to meet the gap by raising new capital or restructuring their balance sheets.

However, the Treasury has already made it clear that the taxpayer will not stump up any more cash for state-backed lenders RBS and Lloyds.

The FPC said the fundraising must be done in a way that “does not hinder lending to the economy”, with small businesses already struggling to get access to affordable finance.

The incoming Prudential Regulation Authority, which comes into force as part of a regulatory overhaul on Monday, will ensure banks and building societies have capital ratios of at least 7%.

The FPC did not disclose which banks have to boost their capital reserves, but some lenders have already started taking action.

The Co-operative Bank, which is reportedly facing a £1 billion shortfall, recently announced the sale of its life insurance and asset management arm to Royal London and will also offload its general insurance business.

The sector will also have to bolster balance sheets next year in line with new European rules and requirements stemming from the recommendations of the Independent Commission on Banking.