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February 5, 2013

Risks Under Review at U.K. Banks

“Regulators are considering forcing British banks to raise billions of pounds in fresh capital to address concerns around a key gauge of their financial health.

As part of a review that began in November, U.K. bank supervisors are assessing the “risk weights” banks assign to their assets—a notoriously subjective process that many analysts and investors are convinced banks have used to understate the riskiness of their balance sheets. Because banks’ capital cushions are generally calculated as a percentage of their risk-weighted assets, banks can make their capital buffers look fatter by understating the riskiness of their assets.

Not all assets are created equal. Banks can hold smaller amounts of capital against less risky assets, such as residential mortgages or government bonds. The riskier the loan, the more a bank must put aside.

British banks are locked in tense discussions with the Financial Services Authority to determine how and whether they need to shore up their balance sheets, according to regulators and bank executives. The results of these negotiations, which could see banks sell chunks of their businesses or issue debt, will be presented by the Bank of England in March.”

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Read full Wall Street Journal article here

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