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RBS and Lloyds have overstated their capital

RBS and Lloyds account for as much as £20bn of a £25bn capital shortfall across the sector.

The Financial Policy Committee (FPC) of the Bank of England has identified that UK banks have overstated their capital by £52bn after examining their balance sheets.

However, the estimate was reduced to £25bn after selling in banks’ existing capital buffers. Regulators believe that about half of the £25bn sector-wide shortfall is covered by banks’ existing plans to retain profits, shrink balance sheets and cut bonuses, reported the Financial Times.

Royal Bank of Scotland (RBS) accounts for about £6bn of the shortfall with Lloyds Banking Group falling about £3bn short. Barclays’ gross shortfall was the third biggest at less than £2bn.

Sir Mervyn King, chairman of FPC and governor of Bank of England, said the shortfall did not require further injections of public money into RBS or Lloyds. He said: “The shortfall of capital, which the FPC has identified today, is not an immediate threat to the banking system and the problem is perfectly manageable.”

The committee concluded that banks had understated their capital needs for potential fines by £10bn and their risk from asset writedowns by £30bn. In addition, FPC supervisors also found that the banks were understating their risk-weighted assets by £170bn.

“While the FPC wants banks to meet additional capital levels in a way that will not restrict lending, it is difficult to see how this can be achieved in practice,” said Matthew Fell, director for competitive markets at the CBI.

But Sir Mervyn disagreed: “Far from reducing lending, today’s recommendations will support lending and promote growth.”