The latest drastic move by regulators, designed to prevent a repeat of the 2008 financial crisis, comes from the Financial Stability Board, or FSB. The FSB is a global regulator and announced yesterday that in the near-term, it will introduce rules requiring big banks to hold much more capital than current regulations dictate.
Specifically, the FSB has announced that the capital set aside should be worth 15% to 20% of the bank’s risk-weighted assets. That is a far bigger cushion against losses than is required by current banking rules and more than double the amount of capital currently held by some banks.
Analysts estimate the new capital requirements could cost €200bn, or £157bn for Europe’s banks alone.
Systematically Important
Unlike previous rules put in place by regulators, these new capital requirements will only affect global banks that are systematically important to the global financial system.
In the UK, the banks considered systematically important are Barclays (LSE: BARC), Standard Chartered, HSBC and the Royal Bank of Scotland. Lloyds (LSE: LLOY) has been removed from the list as its potential impact on financial systems has declined in recent years.
For Lloyds this is great news. The bank has been trying to reduce its exposure to the global financial markets over the past few years. Based on the FSB’s recommendations, the bank has succeeded in shutting itself off. Further, Lloyds already has enough on its plate in terms of meeting the Bank of England’s existing capital requirements.
Raising cash
Obviously, these demands from the FSB will affect banks going forward. If Barclays is forced to boost its capital position, the bank is going to have to start saving.
Indeed, the bank reported a core capital ratio of 10.2% at the end of the third quarter, a far cry from the ratio of 20% proposed by the FSB. Still, it’s likely that the FSB will give banks plenty of time to meet the required ratios but until that time, Barclays and its peers will have to operate conservatively, which could mean a dividend cut.
Lloyds on the other hand does not need to worry about the FSB’s recommendations, but management does need to worry about the bank’s current level of capital. In particular, the results of the ECB’s asset quality review and stress tests highlighted the fact that Lloyds’ balance sheet is not as robust as some investors have come to believe.
Additionally, the bank is targeting an additional £30bn of loans to customers as part of its new three-year strategy, with the aim of increasing its stock of mortgage lending by £20bn. This aggressive balance sheet expansion will only increase the need for additional capital.
Shareholder impact
The big question is, how will the FSB’s demands affect shareholders?
Well, Lloyds’ investors, for the time being, don’t need to be overly concerned. The bank remains on course to reinstate its dividend again this year and its capital position has improve significantly since the ECB’s stress tests were conducted — the ECB used figures from 2013.
However, Barclays’ future is more uncertain. The bank is struggling to bring down its leverage ratio and some analysts have speculated that the bank could be contemplating a dividend cut, in order to save cash and bolster its existing capital position.
If there’s already some speculation that Barclays could be forced to slash its dividend to save cash, demands by regulators for the bank to almost double its capital cushion would almost certainly result in a cash call, or dividend cut.
