LONDON, March 17 (Reuters) - Britain's banks are in better health than they
were two years ago at the height of the financial crisis but still face risks like a possible debt restructuring in peripheral euro zone states, the Financial Services Authority said on Thursday.
The UK watchdog said in its prudential risk outlook, which shapes how it will spend its budget to supervise banks over the coming year, that lenders are not in the clear yet.
'In their stress testing, firms should consider a range of policy options in the euro zone peripheral countries, including a prolonged period of austerity and possible restructuring of bank and sovereign debt,' the FSA report said.
UK bank exposure to the peripheral euro zone countries was 338.5 billion pounds ($544.1 billion) last September, mostly in Ireland, 64.8 billion pounds, and Spain, 44.6 billion pounds.
Exposure to Greece and Portugal was far smaller and the bulk of all exposures to peripheral euro zone countries was to households and non-financial companies rather than to sovereign debt or the banking sector, the report said.
Markets are betting Greece may have to restructure its debt despite a bailout from the EU and that similar rescue for Portugal may now be inevitable.
UK banks also face risks from commercial property, the end of low interest rates and rapid property price inflation in emerging markets.
'In the face of these still important risks it is vital that banks focus on achieving further progress to sound funding positions,' FSA Chairman Adair Turner said.
ROE RETHINK
Many UK banks are already in line or exceed the 7 percent core Tier 1 capital ratio required under tougher new global rules known as Basel III being phased in from 2013.
They are also expected to pass the EU-run stress test of European banks when the results are released in June.
But after Britain was forced to open taxpayers' wallets to nationalise Northern Rock and buy chunks of Lloyds and RBS, Turner is not taking any chances.
'To meet Basel III standards some firms will need to strengthen capital positions further and should ensure that dividend and remuneration policies are consistent with the need to build up capital to meet these revised standards,' the FSA report said.
Turne said on Wednesday banks should ideally have core capital ratios of 15-20 percent.
Thursday's report said shareholders should review how appropriate a bank's return on equity (ROE) target is to avoid 'imprudent risk taking'.
The reporting season showed banks across Europe under regulatory pressure to cut or scrap dividends and revise down their ROE targets to the mid teens from 20 to 30 percent in pre-crisis boomtime.
'Although major UK banks continue to target returns on equity of 12 to 15 percent, those may not be achievable in future, even if economic growth remains on track,' the report said.
Source: www.lse.co.uk
were two years ago at the height of the financial crisis but still face risks like a possible debt restructuring in peripheral euro zone states, the Financial Services Authority said on Thursday.
The UK watchdog said in its prudential risk outlook, which shapes how it will spend its budget to supervise banks over the coming year, that lenders are not in the clear yet.
'In their stress testing, firms should consider a range of policy options in the euro zone peripheral countries, including a prolonged period of austerity and possible restructuring of bank and sovereign debt,' the FSA report said.
UK bank exposure to the peripheral euro zone countries was 338.5 billion pounds ($544.1 billion) last September, mostly in Ireland, 64.8 billion pounds, and Spain, 44.6 billion pounds.
Exposure to Greece and Portugal was far smaller and the bulk of all exposures to peripheral euro zone countries was to households and non-financial companies rather than to sovereign debt or the banking sector, the report said.
Markets are betting Greece may have to restructure its debt despite a bailout from the EU and that similar rescue for Portugal may now be inevitable.
UK banks also face risks from commercial property, the end of low interest rates and rapid property price inflation in emerging markets.
'In the face of these still important risks it is vital that banks focus on achieving further progress to sound funding positions,' FSA Chairman Adair Turner said.
ROE RETHINK
Many UK banks are already in line or exceed the 7 percent core Tier 1 capital ratio required under tougher new global rules known as Basel III being phased in from 2013.
They are also expected to pass the EU-run stress test of European banks when the results are released in June.
But after Britain was forced to open taxpayers' wallets to nationalise Northern Rock and buy chunks of Lloyds and RBS, Turner is not taking any chances.
'To meet Basel III standards some firms will need to strengthen capital positions further and should ensure that dividend and remuneration policies are consistent with the need to build up capital to meet these revised standards,' the FSA report said.
Turne said on Wednesday banks should ideally have core capital ratios of 15-20 percent.
Thursday's report said shareholders should review how appropriate a bank's return on equity (ROE) target is to avoid 'imprudent risk taking'.
The reporting season showed banks across Europe under regulatory pressure to cut or scrap dividends and revise down their ROE targets to the mid teens from 20 to 30 percent in pre-crisis boomtime.
'Although major UK banks continue to target returns on equity of 12 to 15 percent, those may not be achievable in future, even if economic growth remains on track,' the report said.
Source: www.lse.co.uk
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