UK banks face fresh crisis

 By James Quinn

The UK's largest institutions – including Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland – will require extra capital to meet the new standards. The need for fresh fundraisings – on top of the £100bn of capital injections required during the financial crisis – will cause concern for investors in an industry already suffering from allegations of energy fixing and almost £11bn in provisions for payment protection insurance (PPI) mis-selling.

The fresh requirements will be the result of new international accounting rules regarding when banks take losses for loans on their balance sheets.

Under current rules, losses are taken once they have been incurred. But the fresh proposals would mean a shift to taking expected losses on loans, with a portion of those losses booked initially, with full lifetime losses booked once a loan has begun to deteriorate by a meaningful amount. The changes are designed to give investors and regulators a clearer picture of the quality of a bank's loan book, in a bid to help to avoid a second bank-focused financial crisis.

The Sunday Telegraph understands that the International Accounting Standards Board will publish the new rules in the first quarter of next year. It is further understood that recent stress-testing by major UK banks found that, based on the new rules, provisions for loan losses would have to increase between 30pc and 100pc, dependent on the institution. Bank of England figures show that they have taken around £35bn of provisions for their UK exposures alone.

As a result, the major banks would be forced to raise extra funds to keep capital levels in line with regulators' demands.

A report by corporate governance watchdog PIRC earlier this year estimated that the UK's five biggest banks would require an estimated £27bn of capital to cover expected losses in 2011. The banks disputed the claims, however.

The new rules come on top of mixed messages from the Bank of England regarding adequate capital positions, and with the spectre of Basel III hanging over the industry. British and European banks will be subject to the new accounting standards, and their US rivals to a different take on the expected loss model.

The IASB and its US counterpart, the Financial Accounting Standards Board, had been trying to come up with a global expected-loss rule, but parted ways over the summer. US banks will be forced to take the full expected loss on a loan from the day it is written. But critics suggest this will allow the banks to engage in profit management, writing back losses during growth periods. "The point is that if you are booking higher allowances at the start when expectations are most uncertain, there is more room for exploitation," said an industry source.

The IASB is believed to be poised to publish the new rules in the first quarter, followed by a 120-day consultation process with industry. The final rules will be in place by the end of next year, but banks and auditors will have 18 months to set up systems, so the rules will not be enforced until mid-2015. In a speech he will give to the London School of Economics on Tuesday, IASB chairman Hans Hoogervorst is expected to pile pressure on the financial services industry by announcing planned changes to the way leases are accounted for.

He is expected to detail the joint IASB-FASB plans to bring the majority of the world's $600bn equipment leases on-balance sheet. Currently, a lease where total repayments equate to less than 90pc of its value can be classed as an operating lease and held off balance sheet, with only the operating expense appearing in the profit and loss account.

But Mr Hoogervorst's plans are likely to be fiercely opposed by industry lobby groups on both sides of the Atlantic, due to the benefits of this form of less transparent accounting. Telegraph