February 28, 2013 / 3:36 PM / 4 years ago

RBS feels pinch as UK regulator steps up pressure on banks

3 Min Read

LONDON, Feb 28 (Reuters) - Royal Bank of Scotland set aside extra money to cover future losses and assessed the riskiness of its assets more prudently, showing tougher regulations are biting for Britain's banks.

RBS will need more than 4 billion pounds ($6.1 billion) more capital to answer pressure from Britain's financial regulator for it to hold a bigger buffer against potential risks.

The Bank of England's Financial Policy Committee (FPC) warned in November that it was assessing whether banks had set aside enough for potential losses and was concerned that banks could be "gaming" their risk calculations.

RBS took steps to shore up its capital position when it presented its 2012 results on Thursday, saying it would sell part of its U.S. business Citizens and shrink its investment bank to improve capital in the next two years.

"Clearly pressure from the FSA to shore up its capital buffers has forced RBS to announce more restructuring which is likely to further dilute the future returns potential at RBS," said Shailesh Raikundlia, analyst at Espirito Santo.

RBS CEO Stephen Hester said RBS and other banks had worked with the Financial Services Authority on the FPC's concerns.

"The FPC has concerns about provisioning across banks so we have put our thumbs on the scale and provisioned hopefully quite conservatively at the year-end to address that element of regulator concerns," Hester said.

"We believe we have answered to their satisfaction."

RBS said bad loan losses had continued to fall last year, but lifted its loan impairment provision to 21.3 billion pounds, from 19.9 billion a year before, to increase its coverage of risky loans to 52 percent from 49 percent.

Another key focus of the FPC, which looks out for trouble spots in the financial system, is how banks assess the risk-weighting they attach to their assets amid concern that internal models are too complex so banks are underestimating how much capital they need.

RBS said the tougher UK stance added 44 billion pounds to its risk-weighted assets (RWAs) in 2012, including a 12 billion increase due to higher estimates for corporate loans.

It expects a further increase of 10 billion to 15 billion pounds early this year. That means RBS will need to hold 4.3 billion pounds more capital to cover the RWA increase since the start of 2012, based on an 8 percent capital ratio.

Barclays has already shown the impact of the stricter regulations and Lloyds, HSBC and Standard Chartered are expected to follow when they report results in coming days, before an FPC report late next month.

RBS and Lloyds are under most scrutiny, as analysts say they have less of a capital cushion than rivals.

RBS said despite the regulations it cut its RWAs by 58 billion pounds to 460 billion, helping its core Tier 1 capital ratio increase to 7.7 percent, based on Basel III capital standards.

It expects that to rise to near 9 percent this year as it cuts another 20 billion pounds of RWAs from its investment bank.

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