LONDON 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 (BARC.L) and HSBC (HSBA.L) 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 (GS.N), Morgan Stanley (MS.N), JPMorgan (JPM.N) and Deutsche Bank (DBKGn.DE) 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, signaling 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, signaled on Friday it will give smaller firms breathing space.
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 start date.
The PRA is still considering whether to change rules on bankers' bonuses in response to a UK parliamentary commission on banking standards.
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 salary.
(Reporting by Huw Jones, editing by Chris Vellacott/Ruth Pitchford)