UK bank stress test capital measure changed late in process - sources
By Steve Slater and Huw Jones
LONDON (Reuters) - Britain's regulator told banks this week they must use a stricter measure of how they measure capital under a health check of lenders that will be released on Sunday, people familiar with the matter said.
The European Banking Authority (EBA) is assessing how 123 European banks would cope under a recession scenario and will release its findings of their capital strength on a so-called transitional basis.
That varies by country, depending on the pace they are applying the global Basel III capital rules that have to be fully in place by 2019. The methodology used is important because it could make a significant difference to findings on their capital ratios.
Britain - which is implementing Basel rules earlier than the global guidelines - has told banks they must use the method they currently report under, which is effectively the full Basel III rules, four industry sources said.
The Prudential Regulation Authority (PRA), part of the Bank of England, had previously told banks to report results on the less strict transitional basis "in order to improve comparability and consistency across EU firms." (http://www.bankofengland.co.uk/financialstability/Pages/fpc/capital.aspx#)
The PRA declined to comment. The EBA said it made clear in April that transitional capital rules should be the "current" rules in place in each country.
Reporting on a minimum transitional basis and the full Basel III basis could alter capital ratios by up to 1 percentage point, analysts said.
"When banks compare themselves against others they will point out the different treatment in national criteria. If some of the UK banks lose 100 basis points because of transitional arrangements that are not being applied to others, that is a fair point," said Fernando de la Mora, head in Spain and Portugal of consultancy Alvarez & Marsal.
MOST INTERESTING NUMBER
As well as the headline transitional numbers released by the EBA, it will release a "fully loaded" capital number for each lender for comparison purposes.
That will be the most interesting number for comparisons, especially for the big banks, de la Mora said.
The phasing of Basel III rules is a complex issue that includes how banks make deductions to capital for deferred tax assets and intangible assets.
The EBA is coordinating the test but national authorities are overseeing the process.
Analysts expect all Britain's banks to have common equity equivalent to 5.5 percent at least of their risk-weighted assets, as required to "pass" the EBA healthcheck. But there is likely to be scrutiny on banks whose capital is only slightly above that target.
Four British banks are taking the EBA's test - state-backed Royal Bank of Scotland, along with HSBC, Lloyds Banking Group and Barclays.
The PRA is conducting its own UK stress test, which covers eight banks and building societies and includes a more adverse scenario for the UK economy and house prices. The results of that test will be released on Dec. 16.
(This story was refiled to reflect de la Mora is head of consultancy Alvarez & Marsal in Spain and Portugal)
(Editing by David Holmes)
