* FPC will consider action on bank risks in June
* Banks fear UK will push ahead of global initiatives
* FPC says investors may have "too rosy" view on markets
By Huw Jones
LONDON, April 5 Britain's banks must address
persistent doubts among both investors and regulators about
their capital adequacy ratios by tightening up the way they
quantify risk, the Bank of England said.
The Bank of England's Financial Policy Committee (FPC) said
it will discuss at its next meeting in June whether banks should
be forced to add up risks in two different ways, which could
bump up costs.
Global and European regulators have found wide variations in
how big banks quantify risks to determine their capital adequacy
"The Committee agreed that a line needed to be drawn under
doubts about UK banks' capital adequacy," the FPC said in
minutes of its March meeting published on Friday.
The committee discussed requiring banks to report
risk-weighted assets using both their bespoke in-house models
and the so-called standardised approach, which requires using
ratings from outside credit rating agencies.
"This would provide greater transparency for investors and a
platform for banks to communicate more clearly about the factors
driving their risk weight calculations."
The global Basel Committee of banking supervisors is looking
at possible reform later this year and UK banking officials fear
the FPC could "front run" what Basel recommends.
The FPC said it will evaluate in June if "further action was
appropriate in the light of these related initiatives".
Andrew Bailey, chief executive of Britain's new banking
supervisor, the Prudential Regulation Authority at the BoE, has
criticised banks for "outrageous gaming" of risk weights.
UK banks already have to hold more capital to cover
commercial property, irrespective of what models show.
Gary Greenwood, an analyst at Shore Capital, said the FPC
was trying to give critics of in-house models comfort but there
was no perfect way to calculate bank capital.
"It's up to the regulators to sign off on internal models so
they should not have agreed to them in the first place. It's a
bit of backtracking by regulators trying to point the blame
elsewhere," Greenwood said.
A greater reliance on the standardised approach would fly in
the face of global efforts to scale back on banks' heavy
reliance on credit ratings after agencies gave high ratings to
some assets which turned "toxic" in the financial crisis.
The FPC also said Britain's banks needed to keep up a tight
rein on paying bonuses and dividends as they build up capital.
Last week, the FPC told Britain's banks they must raise 25
billion pounds of extra capital by the end of the year to absorb
any future losses on loans.
But some FPC members worried that the extra capital banks
were ordered to hold might not be enough and "were inclined to
put in place additional upfront insurance," the minutes said.
Recent stock market gains partly reflect "exceptionally"
accommodative policies by many central banks and market
sentiment "may be taking too rosy a view of the underlying
stresses", the FPC cautioned.