Banks Face Ring-Fencing Capital Bombshell

Britain's five biggest lenders will be told on Thursday that they need to find billions of pounds of additional capital as part of industry reforms designed to shield taxpayers in a future industry crisis.

Sky News has learnt that the fresh bombshell will be delivered by the Bank of England in a consultation paper to be published on the implementation of the new ring-fencing framework that will be introduced in 2019.

The affected banks - which each have balance sheets of more than £25bn - are Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Santander UK.

Banking industry sources said they understood the Prudential Regulation Authority (PRA) would publish an aggregate capital figure that the biggest banks would have to find collectively to properly insulate their new ring-fenced operations.

The size of the multibillion pound figure was unclear on Wednesday night, but it will be in addition to Government estimates of up to £3bn in one-off costs triggered by the restructuring, as well as annual running costs forecast at between £1.7bn and £4.4bn.

Some of the banks will have a greater exposure than others, with analysts suggesting that Barclays' sizeable investment banking operations would mean it was likely to have to find a greater sum than Lloyds Banking Group, which is principally a retail and corporate lender.

The aggregate sum outlined by the PRA will not necessarily mean that the banks are required to raise capital externally, sources indicated.

Some of the shortfall could be addressed by the capital-accretive sale of assets, while it might also be possible to transfer some capital from banks' non-ring-fenced operations into their segregated entities.

The ring-fencing regime was the principal recommendation of the Independent Commission on Banking chaired by Sir John Vickers, which delivered its verdict on banking reform in 2011.

The inquiry, ordered by George Osborne, the Chancellor, after the 2010 general election, was designed to reduce the risk of another banking crisis.

The new regime is designed to insulate taxpayers by making it easier to resolve a failed investment bank without affecting the day-to-day operations of high street lenders.

Taxpayers spent more than £65bn in 2008 and 2009 bailing out Lloyds and RBS, and tens of billions of pounds more rescuing Northern Rock and Bradford & Bingley.

Further support totalling hundreds of billions of pounds was funnelled into the banking system through emergency liquidity schemes to enable lenders to continue funding their operations.

Sir John has continued to maintain that ring-fencing is necessary, insisting that it is a "done deal", despite intense lobbying from bankers who argue that other domestic and international reforms mean that the industry is now sufficiently safe not to require it.

The Government has gone further with measures to 'electrify' the ring-fence separating retail and investment banking operations, meaning that regulators will have powers to order the full break-up of individual institutions if they do not comply with the new rules.

Thursday's paper will focus on structural issues relating to ring-fencing and will consist largely of technical detail, industry sources say.

The PRA has already set out other proposals relating to the governance and management of newly restructured banks, with strict regulations about the independence of directors of ring-fenced entities.

Those rules have led some banks to consider applying for waivers, while Lloyds is expected to seek a waiver for the broader restructuring because of its limited investment banking activities.

Neither the PRA nor the banks would comment on Wednesday.