Bank of England warns Lloyds and RBS need billions more in capital

UK regulators have warned the Royal Bank of Scotland and Lloyds Banking Group that March of this year is the final deadline to cope with an impending financial ‘black hole’ caused by the undervaluing of bad debts.

The warning came as regulators admitted that the government had overpaid when rescuing the banks in 2008. Britain’s banks may now be forced to raise large amounts of capital in a short time to ensure they remain solvent, Bank of England (BoE) officials said.

The exact amount of the shortfall was not specified, but bank officials confirmed it was substantial. The sum could reach £30 billion (over $48 billion), according to Brooks Newmark, a Tory member of the Treasury Select Committee, the Telegraph reported. BoE Financial Policy Committee member Michael Cohrs also said that he doesn’t believe that UK taxpayers will see any returns on the bank bailouts, let alone profits.

Earlier, the Guardian reported that UK taxpayers would end 2012 with a £23-billion loss on their stakes in Royal Bank of Scotland and Lloyds Banking Group. BoE Governor Mervyn King admitted on Wednesday that the US has been more successful in bailing out its banks than the UK, adding that recapitalizing the banking system in 2008 was initially a British idea, which was then copied and improved by the US.

As a result, US taxpayers saw returns equivalent to 15 percent after its bailouts. The US federal government bought stakes in major banks at about half their book value, and has already been repaid for most of those investments, the Telegraph reported. The UK paid roughly twice the US rate for its stakes in Lloyds and RBS.

Lloyds and RBS are considering raising more capital by selling down assets or shrinking their investment banking arms, rather than demanding further funds from UK taxpayers. Andrew Bailey, head of prudential regulation at the Financial Services Authority, suggested the firms should “reduce their investment bank balance sheets.”

Sir King was quoted by the Telegraph as saying that the best course of action is to deal with the problem “straight away.” He offered the banks “two options — either they raise more capital or they restructure… Investors may not like it, but they will be better off over time.”