Banks told to raise £25 billion for a rainy day
UK banks and building societies must raise a total of £25 billion between them by the end of the year to protect against potential losses. But what will this means for borrowers and savers?
Today the Bank of England’s Financial Policy Committee (FPC) has told banks and building societies that they need to fill a £25 billion black hole by the end of the year.
The watchdog, which acts on behalf of the Bank of England, said that banks and building societies had not weighted risk properly and may have underestimated losses by £50 billion.
Boosting the buffer is intended to protect against hidden losses, regulatory demands and potential fines for mis-selling scandals like PPI.
Main culprits
We won’t be able to find out exactly which banks have the worst capital reserves.
But HSBC was quick to announce that it was comfortably capitalised and won’t need to raise the extra cash.
So the £25 billion shortfall is likely to be shared largely between Barclays, Royal Bank of Scotland (RBS) and Lloyds.
RBS and Lloyds are owned by the taxpayer so this development could delay plans to sell stakes back to private investors.
Impact on borrowers and savers
The Bank of England wants banks to raise the £25 billion shortfall by the end of the year without damaging lending.
The FPC said: “The FSA should ensure that firms either raise capital or take steps to restructure their business and balance sheets in ways that do not hinder lending to the real economy.”
So that means banks won’t be able to raise rates on things like mortgages to cope with the shortfall.
Instead banks will have to look elsewhere to raise capital and might target bankers’ bonuses, scale back investments or turn to savers.
Savers have suffered from dismal rates for a while now. Many believe this is as a result of the record low base rate and Funding for Lending Scheme which have helped borrowers. Read Bank of England admits Funding for Lending to blame for dismal savings rates.
Now the tables may turn and savers given a much better deal.
Reaction
Business Secretary, Vince Cable, spoke out against the decision saying it would damage lending to business.
He told Sky News: “The idea that banks should be forced to raise new capital during a period of recession is an erroneous one. This FPC exercise will prolong the time it takes for the British economy to recover by further depressing already-weak SME lending.”
What do you think? Should banks be more realistic about risks and save for a rainy day? Will this be a boost for savers?
More on banking:
Think twice about saving in foreign banks
What the Cyprus bank crisis means for our money
Handelsbanken: the great bank you've never heard of
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