Q&A: How do the new banking rules on capital affect you?

The UK banks seem able to pass the new regulatory hurdles with ease but does that mean they will begin paying dividends again and what do the new rules mean for lending?

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by Deborah Hyde on Sep 14, 2010 at 08:08

Q&A: How do the new banking rules on capital affect you?

The latest rules on how much cash banks need to keep aside in case of a rainy day may be less rigid than feared and good news for shareholders but will they really make the world a safer place or stem the rising costs of banking?

Why are shares in the banks rising?

For many Sunday's announcement about what levels of capital banks will need to set aside is a turning point for the sector as it was seen as the last important regulatory hurdle. Since the Basel Committee on Banking Supervision has now decided to set the bar at a level most agree the UK banks can easily meet investors are increasingly focused on the blue sky potential for the banks.

Robert Law, banking analyst at Nomura, said: 'the great majority of large European banks are already well in excess of minimum requirements today and therefore this should be seen as a positive catalyst, in our view.'

I heard it might mean Lloyds will be able to pay a dividend again

For those banks that are relatively well placed to meet the increased capital standards, Law thinks the Basel announcement should be positive for dividend policy.

'Once the uncertainty over capital requirements is removed, profitable banks have indicated they will seek to normalise distribution. This now looks possible in 2011 and arguably even in 2010 in some cases,’ he said.

And since the UK banks are profitable and can comfortably meet the new requirements, you might expect them to start paying some cash back to long-suffering shareholders as soon as possible.

But few commentators think that likely for a number of reasons:

The Financial Services Authority is likely to expect UK banks to hold more capital than some of their European peers since the impact of the crisis was more severe here. Some think the UK banks will be expected to hold closer to 10% of the value of risky assets in capital, higher than the 7% level set for other European countries.
Andrew Lim, European banks analyst at Matrix, says Lloyds will not have any spare capital until 2012.
Not paying a dividend was one of the conditions of the European Commission approving the UK bailout of Lloyds and RBS.
HSBC, Barclays and Standard Chartered don't face such hurdles but may choose to use their cash in other ways. For example, HSBC is said to be looking to buy South Africa's Nedbank.
Law points out Barclays is arguably closest to the minimum levels that he believes UK regulators are likely to require, particularly given its investment banking arm is far bigger than its retail banking business.

Might the banks use the money to buy each other?

Stefano Harney, deputy director of the School of Business and Management at Queen Mary, University of London, thinks the consequence of the new rules will be that the stronger banks will buy the weaker ones.

HSBC is looking to buy Nedbank and Spain's Santander has been busy acquiring banks in the UK and in Poland.

Fredrik Johansson, director, PricewaterhouseCoopers, believes UK building societies may continue to look for ways to build critical mass through mergers.

All of which means less competition and fewer choices for bank customers.

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3 comments so far. Why not have your say?

I am not sure what point the article is trying to make here. We are recovering from a liquidity crisis. Markets did not know how to value assets held by banks on their balance sheets so the easiest way to deal with it was to value everything at close to zero - patent nonsense of course. Asset prices are recovering as the level of hysteria begins to diminish. Banks are not lending because would be borrowers are still listening to the wrong pundits and are still too busy stocking up on tinned food. Banks have been kicked by every politico regardless of whether fully justified or not. So the answer is simple as far as the banks are concerned- stuff 'em- can you blame them? As asset valueations are written back ratios will soar and the banks currently geting most of the kicking will be ridiculously over capitalised on any measure currently in vogue or one yet to be dreamt up by our financial morality police. Look out for share buy backs and dividends as soon as the rules allow.

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Joe, your interpretation is as good as anyone could risk from such a confusingly written article. Any mention of Angela Knight or Sandra Quinn brings me out in a cold sweat. I know they represent different organisations but they both exist essentially to defend the banking and payments systems in the UK (not so different really).

On the subject of defending the banks I think you may have overlooked the assumption most of us made that the governance system within the banks themselves - independent Risk Committees and Remuneration Committees - would protect us all from the type of meltdown which took place.

What is now going to replace that discredited system of governance?

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joe stalin

Sep 15, 2010 at 18:10

Bryan hi- Angela and Sandra are merely mouth pieces for the industry. The crisis we had was liquidity driven. What scared banks and investors a like was how Bear Stearns and Lehman's were brought down in a mater of days by a whisper campaign. The system such as it was and probably still is to some extent today is driven by acces to the wholesale funding markets and banks' ability to trade with each other. If somebody begins a chinese whisper then you have seen what happens in a matter of hours.

There is no doubt in my mind that some of the stronger players such as JP Morgan, Morgan Stanley, with the colllusion of short selling hedge funds like Paulson were major contributors to the whisper campaigns enabling tem to snap up Bear and in Barclay''s case Lehman's for a ridiculously low price with the State providing back stop financing. You have seen that most of the money lent out under TARP in the US has already been repayed by the banks and others such GM and AIG are looking to as well.

The collapse of Lehman and Bears has benefitted the survivors just as the demise of Northern Rock in the Uk got rid of an aggressive mortgage lender much to the pleasure of the others and to the cost of those seeking a mortgage. Standard Chartered was instrumental in advising the Govt on rescue terms for LLoyds and RBS ensuring the terms were are draconian as possible- wonder why eh? The banks have taken a lot of stick some of it justified no doubt but events happened so fast that there was little time to be rational- the media saw a great opportunity to fan the flames with banks reluctant to speak for fear of revealing commecially sensitive information. Silence was interpreted as culpability.

I hate to say it but Brown's actions bought time allowing players to take a step back and take a deep breath and find some more capital. Looking ahaed we now need to make sure we retain our banking industry and don't let it go to Germany who have long wanted to take away London's pre-eminent position. We need the financial sector wart and all as the unions and labour have destroyed anything else we had left that was worth anything At least Brown realised that the banks had been handsome contributors to the State coffers. Think of a time without any North Sea oil revenue- there is little else in cupboard. sadly

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