British banks are not as healthy as their reported capital ratios suggest, but the problem is manageable and already partly understood by markets, Bank of England Governor Mervyn King said on Thursday.
Speaking at a news conference to explain the Bank's Financial Stability Report, King said the danger to be avoided was that of inadequately capitalized banks holding back wider economic recovery.
Continue Reading Below
"UK banks currently report substantial buffers over the minimum level allowed," King said in his opening remarks to the news conference.
"But, in judging whether banks are adequately capitalized, we need to ensure that reported capital ratios do in fact provide an accurate picture of banks' health. At present there are good reasons to think that they do not."
King said three reasons led the BoE to think that the banks' capital ratios were understated.
"First, expected future credit losses may be understated. Second, costs arising from past failures of conduct may not be fully recognized. And third, the risk weights used by banks in calculating their capital ratios may be too optimistic," he said.
But King added that the problem should be kept in perspective.
"The problem is manageable, and is already understood at least in part by markets. But it does warrant immediate attention."
The BoE's Financial Policy Committee recommended that the FSA take action to ensure that the capital of UK banks and building societies reflects a proper valuation of their assets, a realistic assessment of future conduct costs, and prudent calculation of risk weights.
(Reporting by Estelle Shirbon Editing by Maria Golovnina)