BoE urges banks to raise capital from markets

Thu Sep 27, 2012 6:30am EDT
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By Huw Jones and David Milliken

LONDON (Reuters) - British banks should take advantage of any lull in euro zone turmoil to tap markets for fresh capital to bolster their defenses, the Bank of England's Financial Policy Committee said on Thursday.

The minutes of the FPC's September 14 meeting add urgency to its existing call for banks to raise capital, saying banks should tap outside investors for capital instead of simply relying on curbing bonuses and keeping back profits.

"Recent improvements in market conditions should help in that respect, with the options including debt conversion and the issuance of suitable contingent capital instruments as well as conventional equity," it continued.

Britain's relatively well-capitalized banking sector is confident of meeting targets under the Basel III rules brought in since the 2008 financial crisis, but they also face risks ranging from legal cases around the Libor interest rate fixing scandal to a wobbling domestic economy and property sector.

Analysts said investors were still leery of banks, noting the difficulties some European banks had in tapping markets. There has also been mixed investor appetite for Royal Bank of Scotland's (RBS.L: Quote) forced sale of insurance unit Direct Line.

"The senior management of banks are also not incentivized to raise new equity capital. It would impinge on the wealth prospects of senior management due to dilution, and the new equity would probably be raised at a significant discount," said Vivek Raja, a banks analyst at Oriel Securities.

The British Bankers' Association had no immediate comment.

The committee said banks had made only "limited progress" in building up their capital cushions, partly because profits were being hit by the weak economy, payouts for mis-selling and other conduct issues.   Continued...