* PRA sees 27-29 billion pound shortfall for investment
* PRA gives breathing space on leverage ratio to many firms
* No escape on maintaining cash buffers
* PRA yet to consider any changes to bonus rules
By Huw Jones
LONDON, Aug 2 Foreign investment banks in
Britain face a shortfall of up to 29 billion pounds to meet new
EU capital rules aimed at shielding taxpayers from having to
rescue banks again, the Bank of England said on Friday.
The rules implement new global standards known as Basel III
in the 28-country bloc, forcing banks to roughly triple the
amount of capital they must hold compared with before the
2007/09 financial crisis when several banks were bailed out.
The central bank's Prudential Regulation Authority, which
supervises lenders, set out how it plans to apply the rules to
2,176 firms in Britain from 2014.
The PRA has already forced big domestic lenders like
Barclays and HSBC to meet or exceed the new
rules and Friday's consultation largely affects how smaller
banks and other financial institutions must comply.
It estimates that big deposit-taking banks face an annual
cost of 9.5 billion pounds ($14.4 billion) at most to comply
with the rules.
For the first time it estimated the shortfall at the
investment firms it regulates - meaning the non deposit-taking
banks - saying they will have to find 35 billion to 43 billion
pounds to comply with the new rules, the PRA said.
The investment firm category includes foreign investment
banks like Goldman Sachs, Morgan Stanley, JPMorgan
and Deutsche Bank operating in London.
The shortfall would shrink to 27 billion-29 billion pounds
during the phase-in of the new rules which runs to 2018 if
investment firm balance sheets were "adjusted", the PRA added.
"The lower estimate reflects the reduction in risk, and
therefore risk-weighted assets, that investment firms may hold
once they have adjusted to the... requirements," the watchdog
said in its consultation paper.
Investment banks globally are trimming their holdings of
risky assets so they don't have to raise expensive new capital.
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In a move likely to surprise banks, the PRA also proposed a
significant toughening up of a key capital rule from 2016.
Supervisors in the EU like the PRA can ask lenders to top up
their capital above the new mandatory minimum level to cover
specific risks like a sudden shift in interest rates.
The PRA wants the extra capital to be in the highest and
hence most expensive form such as shares or retained earnings,
and no longer in lower quality debt or other instruments.
The EU rules also force banks to build up cash buffers from
2015 to withstand market shocks.
The PRA said it would continue to use its discretionary
powers to make sure firms hold enough cash until the EU rules
come into effect, signalling there will be no temporary relief.
A third element of the EU rules is a new limit on balance
sheets in relation to capital levels, known as a leverage ratio.
The PRA, which is forcing big banks to comply early with
this rule, signalled on Friday it will give smaller firms
The watchdog will consider at a later date whether the
smaller banks, foreign investment banks and building societies
must also disclose their leverage ratios before the EU's 2015
The PRA is still considering whether to change rules on
bankers' bonuses in response to a UK parliamentary commission on
The commission wants the PRA to have powers to cancel a
bonus not yet paid out if a bank ends up needing taxpayer help.
The lawmakers also want bonuses deferred for up to 10 years. The
EU rules will limit bonuses to no more than a banker's fixed