UK finance minister dismisses fresh bank bailout scenario

LONDON Mon Oct 4, 2010 9:55am EDT

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LONDON (Reuters) - Finance minister George Osborne on Monday dismissed a thinktank report that British banks may need another state bailout next year and their borrowing requirements could hit 25 billion pounds ($39.5 billion) a month.

The independent New Economics Foundation (NEF) thinktank said it had examined Bank of England data and concluded that many UK banks appeared to face a funding cliff, as it published a report on Britain's banks entitled "Where Did Our Money Go?"

Royal Bank of Scotland and Lloyds had to be part-nationalized as they ran up huge losses during the credit crisis, and others, such as Barclays and HSBC, have benefited from cheap credit provided by the central bank.

UK banks have a January 2012 deadline to repay 185 billion pounds they borrowed from the Bank of England against 287 billion pounds of illiquid assets, mostly residential mortgage backed securities, under the BoE's Special Liquidity Scheme.

They also face further pressure from new Basel III banking industry rules, due to be phased in by January 2019, which will require banks to hold more capital, and on Monday Switzerland laid out tough new requirements for Credit Suisse and UBS.

Asked about the NEF report on Monday, Osborne said he was not expecting any British bank to need any further government support.

"I am certainly not expecting and I have no indication at all that any British bank needs any further support," Osborne told Sky News.

"Those decisions were taken and the banking system in Britain is much more stable than for example the banking system in Ireland," he added, referring to Ireland's possible 50 billion euro bill to shore up the Irish banks.

IRISH EXPOSURE

Shares in the top British banks recovered after falling during the morning trading session. Royal Bank of Scotland rose 0.7 percent, Lloyds edged up 0.1 percent, while Barclays and HSBC gained by around 1 percent.

In July, RBS said it had a 4.3 billion pound exposure to Ireland, the biggest out of Britain's banks. Lloyds said in August it was closing its Irish banking operation but Lloyds still has outstanding Irish loans to deal with.

Jane Coffey, head of UK equities at Royal London Asset Management, said there were liquidity issues concerning the UK banks but added she did not think the situation was as dramatic as portrayed by the NEF.

"It's liquidity they lack rather than capital but I am not unduly concerned about the UK banks," said Coffey.

In response to the NEF report, the British Bankers Association (BBA) said the country's banks were well placed to deal with any financial problems that may arise in the future.

"UK banks have already put in the work to rebuild their businesses and exceed the international standards for capital and liquidity," the BBA said.

"Not all banks in the UK received support from the government. Those that did are paying commercial rates for it - it wasn't a hand-out, a grant or a gift. And the government still holds that investment that will eventually be sold off profitably," added the BBA.

The main requirement of the new Basel rules is for banks to have a minimum Tier 1 capital ratio of 7 percent. Many banks' Tier 1 ratios are already above this but the Basel III regime is much stricter on what can be counted as Tier 1 capital.

The heads of top British and French banks said last month said they could meet tighter capital rules without a rights issue by using cash generated by their own profits.

However, credit rating agency Standard & Poor's said in August that several UK banks were overly reliant on wholesale funding that is government guaranteed or central bank funded.

The NEF thinktank also backed separating companies' retail banking and investment banking operations -- an option which the UK's Independent Commission on Banking (ICB) is currently examining and one that the banks aim to oppose.

($1=.6322 Pound)

(Additional reporting by Matt Falloon and Adrian Croft)

(Editing by Jon Loades-Carter and Louise)

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