UK banks are ‘masking’ £40bn of undeclared losses

The Momentum UK Team 06 June 2012

Consumers seeking mortgage or business loans could be turned down as a result of the UK’s top five banks being engulfed in £40bn of bad debt, according to the Pensions and Investments Research Consultants (PIRC).

The report

Conducted by shareholder advisory group the PIRC, the report examined the 2011 accounts for the five of the UK’s leading banks; Royal Bank of Scotland, HSBC, Lloyds Banking Group, Barclays and Standard Chartered.

Between these banks the research measured £40bn of undeclared losses set to be written off as ‘bad debt’ in the coming years which were not yet taken against profits.

This is following an international accounting standards rule introduced in 2005 which disallowed companies from provisioning against possible losses. The regulation was highly criticised by many, including the House of Lords. On the subject of the rule, the PIRC said it “was masking the true position [of the accounts] by including fictional assets and fictional profits.”

The banks

82% state-owned, Royal Bank of Scotland was said to be the biggest culprit of undeclared losses boasting an estimated £18bn of bad debt. The PIRC suggested that this amount could consume more than a third of its capital buffer and potentially force them to seek another bail-out loan from the taxpayer.

The other banks also showed considerable losses with HSBC following behind RBS with £10bn. Barclay’s bad debt was calculated at £6.7bn and both Lloyds and Standard Chartered measured at an estimated £3.6bn. PIRC presented the findings to the banks and apparently received no disputing responses.

The consequences

As a result of the undeclared losses which are deemed to be covering the true situation of banks’ accounts, dividends and bonuses could have been paid out based on amplified profit figures, at a time when holding on to capital is crucial for banks. The PIRC believe that by failing to wipe their balance sheets of bad debt, banks may be unable to provide home or business loans leaving consumers suffering.

Head of Governence and Financial Analysis at PIRC, Tim Bush said:

“The scandal is the fact that banks are delaying de-risking and de-gearing due to the accounting standards.”

“The funds are being tied up, rather than being put to work elsewhere.”