London: British banks could be underestimating the riskiness of their property loans and may need more capital to correct this, ratings agency Fitch said on Thursday.
Fitch’s comment chimes with a Bank of England report in November that said the UK’s four biggest banks — HSBC, Barclays, Royal Bank of Scotland and Lloyds — could be over-stating their capital levels by between £5 billion and £35 billion because of the way they measure risk.
The UK’s Financial Services Authority is reviewing how banks weight the riskiness of their loan books and lenders will be told by March if they need to beef up their capital reserves to protect against loans going sour.
The results of the review are not expected to be made public.
“We expect that banks will have to set aside more capital and that this requirement will probably be addressed either by way of additional capital buffers or higher risk-weightings for certain classes of loans,” Claudia Nelson, senior director of financial institutions at Fitch, told Reuters.
“The measures are likely to be introduced gradually.”
A Fitch study showed how retail lenders’ assessment of their loans books has grown rosier since the financial crisis despite rising unemployment and a poor economic outlook.
From the end of 2007 to the end of June 2012, the banks’ risk weighted assets (RWAs) nearly halved to 35 percent from 65 per cent at end December 2007 despite their loan books, comprised mainly of mortgages, staying relatively stable.
The lower the RWA weighting the greater the chance the loan will be repaid and the less capital a bank needs to hold on its books.
A study of banks with a higher exposure to residential mortgages revealed an even sharper fall in their perceived risk - despite the property market crash, Fitch said.
Nelson declined to say how much more capital banks could need.